Insiders Continue To Trade Shares For Dollars

04/13/04 08:37:02 AM

by Matt Blackman

Insiders continued to sell while the selling was good, unloading $3.5 billion worth of shares in March. While it was down from the extreme reading in February of $5.1 billion, selling outstripped buying by nearly 30:1 in dollar terms.

Security: NA
Position: N/A

It was another good news-bad news story this month for insiders selling shares in their own companies. According to the monthly client advisory released by the Insider Research team at Thomson Financial, the good news was that insider selling declined 30% from February and insider buying picked up 33% month-over-month to $124 million. The bad news is that March still ranks as one of the strongest months for insider selling in recent years, exceeding the five-year historic average sales figure of $2.7 billion by a healthy margin and insider buying remained below the five-year average of $161 million per month.

Notable insider buys discussed in the advisory were Revlon (REV), Restoration Hardware (RSTO), Tenet Healthcare (THC) and Allegheny Energy (AYE).

Figure 1 � Insider sell/buy ratio showing change in value since November 2002. The reading in March 2003 was $8.51 or less than one-third the value for March '04. Data provided by the Thomson Financial Insider Research Team.

Thomson Financial's favorite measure of insider activity, the sell/buy ratio, registered $28.38 in value of shares sold to those purchased in March. February's final tally of $54.60 ranked as a very close second to the all-time high of $54.87 in February 1991.

Those who have been following my insider reports will remember that insider buying and selling tend to be good buy and sell signals for the rest of us to follow. Insider buying (as demonstrated by a low sell/buy ratio) tends to be a very good buy signal near market bottoms or in bull markets and a high ratio, a good selling signal near market tops and in bear markets. Easy to identify in hindsight, identifying tops and bottoms are far more of a challenge at the time they are occurring.

The all-time high sell-buy ratio reading in February 1991 would not have been a good sell signal to follow as it represented the first time insiders took advantage of a rising market to convert shares into dollars. It was also near the beginning of a bull market.

We are in a much different market now and are eighteen months into a bull market that is showing signs of strain. In this case, the trader using insider data will need to wait for further confirmation that February represented a market top before acting but it is certainly not a signal to be ignored.

SUGGESTED READING:

Blackman, Matt [2004] Insiders Aren't Buying the Bull, March 11, http://technical.traders.com/tradersonline/display.asp?art=1577

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

Thomson Financial [2004], Insider Selling Remains Robust in March, April 5

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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INSIDE BUY/SELL

Insiders Continue To Trade Shares For Dollars

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