In April, we wrote about the fact that insider buying was at its lowest levels since 1992 (Insiders are Selling Into the Rally), now there is even more bearish evidence from insider trading. According to InsiderScore, a company that tracks trends in insider dealings, insider selling has increased to levels not seen since just before the credit bubble burst in July of 2007. More from the Bloomberg article:
Executives at 252 companies in the S&P 500 unloaded shares since March 10, with total net sales reaching $1.2 billion, according to data compiled by Princeton, New Jersey-based InsiderScore, which tracks stocks. Companies with net sellers outnumbered those with buyers by almost 9-to-1 last week, versus a ratio of about 1-to-1 in the first week of the rally.
“They’re looking to take some money off the table because they think the rally will come to an end,” said Ben Silverman, the Seattle-based research director at InsiderScore. “It’s the most bearish we’ve seen insiders, on a whole, in two years.”
The last time there were more U.S. corporations with executives reducing their holdings than adding to them was during the week ended June 19, 2007, the data show. The next month, two Bear Stearns Cos. hedge funds filed for bankruptcy protection as securities linked to subprime mortgages fell apart, helping trigger almost $1.5 trillion in losses and writedowns at the world’s biggest financial companies and the 57 percent drop in the S&P 500 from Oct. 9, 2007, to March 9, 2009.
There is mounting evidence that investors are being more wary of the market right now, as stocks had soared almost unceasingly more than 40% from the lows in early March. After the awful performance of the stock market in the 18 months prior, it is not surprising that the overwhelming trend it to take some profits. Clearly, insiders are not always a reliable leading indicator, but they did look pretty prescient prior to the meltdown…the last time insider selling was this concentrated. Just because someone is an insider of a company doesn’t mean they know where the economy is headed, but they probably have a better understanding of their own firm and where it is headed. When a trend such as this develops across a group of ultra-informed investors, we think it is wise to take notice.
This is just another data point that makes us cautious of what is in store for the market. The recent rally has been spurred by sentiment far more than strengthening fundamentals, but that also means that if sentiment turns another corner the recent gains are more vulnerable.