Insiders Aren't Buying The Bull...

03/11/04 08:04:58 AM

by Matt Blackman

Insider selling hit another extreme level in February. If we are in a long-term bull market, insiders aren't buying it.

Security: N/A
Position: N/A

According to the most recent Thomson Financial Client Advisory, insider selling hit another extreme for the month of February. Insiders sold $51.48 in shares for every dollar purchased, exceeding the previous 10-year high set in October 2003 of $50.44. It was the highest ratio of sells to buys since February 1991. February 2004 marks the tenth consecutive month in which the sell/buy ratio has exceeded $20, which is considered "very bearish." The ratio is the favored measure of insider activity used by the Insider Research team at Thomson Financial.

Figure 1 � The ratio of insider sells to buys in dollar value since November 2002. Data provided by Thomson Financial (http://www.thomsonfinancial.com).

February 2004 also boasted the highest level of insider selling since May 2001 as corporate insiders sold $4.9 billion worth of their own company's stock. Insider buying increased to $96 million from $76 million in January. This is well below the historic monthly average of $163 million in insider share purchases.

Thomson considers an increase in insider selling from January to February to be normal but selling has declined from February to March in the past decade with the exception of the last two years. It will be interesting to see if the decade long historic relationship returns to normal this year.

Due to the various reasons for insider selling, which often includes executive compensation, a high sell/buy ratio has proven to be a less reliable signal than a low ratio reading, which indicates high levels of insider buying. However, I have found that insider selling peaks provided excellent sell signals in the bear market from 2000 to 2002. If this is the top of a bear rally as some pundits have suggested, this could be yet another confirmation signal.

SUGGESTED READING:

Blackman, Matt [2004] Insider Year-End Wrap, Feb 2 http://technical.traders.com/tradersonline/display.asp?art=1450

Seyhun, Nejat H. [2000] "Investment Intelligence from Insider Trading," MIT Press

Thomson Financial [2004], Insider Sales Reach Three-Year High, March 2

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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Insiders Aren't Buying The Bull...

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