From An Investor's Perspective, What Does Insider Selling Signal?

Last week Mark Hulbert warned about the high level of insider sales to purchases:

Consider an index of insider behavior calculated by the Vickers Weekly Insider Report, published by Argus Research, which is based on the ratio of shares sold by insiders to shares bought. Last week, according to the latest issue of the Vickers service, this ratio for NYSE-listed issues stood at 5.13-to-1. The comparable ratio in early September was 5.97-to-1.

He went on to interpret these readings:

To put these numbers into perspective, bear in mind that the sell-to-buy ratio’s long-term average is between 2-to-1 and 2.5-to-1. Vickers consider any ratio below this average to be bullish, and any number above it — like the current level — to be bearish.

At the beginning of the bull market in March 2009, for example, the sell-to-buy ratio got as low as 0.42-to-1, At the stock market’s low in early October of a year ago, at the bottom of that year’s summer/fall correction, the ratio got as low as 1.04-to1.

At its current level of 5.61-to-1, therefore, this ratio suggests that insiders right now are selling between 5 and 13 times as many shares of their companies’ stock — relative to how many they are buying — than they were at those important market lows.

My first reaction was that such a sales to purchase ratio was worrisome for the bulls. But this elevated level of insider selling had been persisting for some time (see Hulbert's September 5 column). What's going on?

Bullish consumers, bearish businesses
One explanation is the divergence between the bullish macro environment, especially for the US consumer, compared to the bearish outlook exhibited by corporate executives. Yesterday's market action was a microcosm of this effect. IBM's earnings release prompted a bearish reaction, but the bullish macro backdrop of the blowout housing numbers overwhelmed the bearish tone from the IBM report.

Take a look at this chart of the divergence between consumer confidence and business confidence. I proxied the former with the University of Michigan consumer sentiment (in blue) and real retail sales (red) and proxied business confidence with Manufacturers' new orders (green).


Note the recent divergence. Measures of consumer confidence are spiking while business confidence has nosedived.

Which is the right indicator for stock prices? My take is that in the current environment of positive price momentum and Fed easing, falling business confidence, which will eventually translate to lower earnings, won't matter until valuations start to matter.

Investors should view insider sales and flagging corporate confidence as a warning sign. Traders should stay long, maintain tight risk control and enjoy the party being thrown by the Fed, the ECB and global central bankers.

Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.