|According to the year-end Thomson Financial client advisory, the insider sell/buy ratio, the leading indicator of insider sentiment for year-end 2002, was very bullish at less than $7 of shares sold for every $1 purchased. This compares to a value of $27.86 for December 2003, more than quadruple the December 2002 ratio. Thomson Financial insider analysts consider any reading below $10 to be "very bullish" and above $20 to be "very bearish" based on historical performance.|
|Fourth quarter 03 sales were $10.4 billion, which represented the highest quarterly selling in more than three years, according to the report. The ratio soared to $50 in October 03, an all time monthly high.|
|Figure 1: Graph of the monthly insider sell/buy ratio in dollars for the last 14 months showing bearish readings since May and the peak in selling of $50 in October 03, an 12-year monthly high. Data provided by Thomson Financial.|
|An annual summary included the fact that insider sales jumped 40% in 2003 to $29 billion for an annual reading of $26 for 2003, which was the "highest (most bearish) annual reading we've taken to date." This compared to $21 billion in 2002 and $31 billion in 2001. |
Buying in 2003 totalled $1.1 billion, the lowest level of buying since 1995.
In my article, "Insiders Continue to Unload," Lon Gerber, Director of Insider Research for Thomson Financial noted that high levels of insider buying (low sell/buy ratio) tended to be a more accurate indicator at market bottoms than high levels of selling (high sell/buy ratio) at market tops. This is because insiders use shares in their own companies as currency, exercising options and selling restricted shares that have become tradable to raise money when times are good. Just because insiders are selling, does not mean they believe the stock price will fall. However, when insiders buy their own shares, they do so because they believe that there is an excellent chance of share value appreciation.
It is interesting to note that while high levels of insider selling tend to be less reliable than buying, the outcome depends on what the market is doing. Extreme (bearish) peaks in the sell/buy ratio recorded between 1997 and 2000 resulted in only minor corrections during the bull market while bearish peaks during the bear market from 2000 to 2003 resulted in major corrections each time according to a study of the ratio plotted against the S&P 500.
What does it all mean? As long as the bull market continues, a high insider sell/buy ratio cannot be relied upon to provide reliable sell signal. Confirmation from other indicators is required. But the fact that the market appears to be at a top of sorts and that we are seeing the highest level of selling ever recorded, cannot be ignored given the recent sector rotation that has been occurring indicating that this rally is getting long of tooth.
However, until we get a trendline break and as long as economic news remains positive, we are in a bull market.
Blackman, Matt  "More Signs of a Market Top," Dec 11
Blackman, Matt  "Insiders Continue to Unload," Nov 18
Blackman, Matt  "Insider Stock Sales Continue to Soar," Sept 26
Seyhun, Nejat H.  "Investment Intelligence from Insider Trading," MIT Press
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