|In a November 5th client advisory, Thomson Financial reported that insiders purchased just $52 million worth of their own corporate shares, the lowest level of monthly purchasing since July 1995. The newsletter went on to say that this, combined with $3.2 billion in sales, drove their favorite indicator of insider sentiment -- the dollar buy-sell ratio -- from $35.93 in September to $59.01 in October, the "highest reading seen in at least a decade." The firm considers any reading above $20 to be "very bearish."|
|Figure 1 shows the monthly buy-sell ratio with lows in December through March ranging from $6.78 to $8.51 shares sold for each dollar purchased, with the strong uptrend in the ratio to October highs. The report noted that the firm had witnessed a "slight upturn" in insider selling from October to November for most of the decade due to policies that restrict sales in the first and third month of the quarters but offered no further explanation for the recent spike in sales.|
|Figure 1 – Annual chart of monthly insider sell/buy ratio in dollars.|
|One reason should be clear. Since March, the S&P 500 index has gained more than 30% in value and many of the high flying tech stocks are up more than 100%. Insiders are simply making hay while the sun shines, to use an old expression.|
|In a telephone conversation earlier this week, 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. |
I will continue to watch insider sentiment for signs of a peak, which could signal a correction but will not act on it until I get confirmation of a significant trendline break. Making large bets at suspected market tops and bottoms have bankrupted many an aggressive trader. To coin a phrase from aviation, there are old traders and there are bold traders, but there are no old bold traders. At least not with any money left.
Thomson Financial website
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