MARK HULBERT Archives | Email alerts March 14, 2014, 2:01 p.m. EDT In-the-know insiders are dumping stocks Opinion: Extreme bearishness among executives is a sell sign By Mark Hulbert, MarketWatch Bloomberg Enlarge Image Corporate insiders are more bearish than they have been in almost 25 years. That isn’t good news for the stock market, since these insiders — corporate officers and directors— know more about their companies’ prospects than the rest of us. In fact, you may want to take their pessimism as a signal to ditch some of your stocks or shift into industries in which insiders aren’t heavily selling, such as energy, financials and basic industrials. Finding the best return in global markets From China to the U.S. to the emerging markets, there is an unusually heavy amount of conflicting data this year. Where are the opportunities for investors? Joseph Tanious, of J.P. Morgan Funds Global Market Insights Strategy team, joins MoneyBeat. Photo: Getty Images. Just be aware that this record bearishness isn’t evident from the insider indicator that gets widespread attention on Wall Street — the ratio of shares of company stock that insiders have recently sold versus the number they have bought. According to the Vickers Weekly Insider Report, published by Argus Research, this sell-to-buy ratio, when applied to transactions over the previous eight weeks, is higher than average but no higher today than it was one year ago — when the S&P 500 SPX -0.28% was poised to produce an impressive double-digit gain. And in late 2003, just as the 2002-07 bull market was gathering steam, the insiders’ sell-to-buy ratio rose to even higher levels than it is today. But this measure is misleading, says Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider behavior. That is because it uses a government definition of insiders that includes a group of investors whose past transactions, on average, have shown no correlation with subsequent market moves: those who own more than 5% of a company’s shares. Though on rare occasions a large shareholder also will be an officer or director, in almost all cases it will be an institutional investor — such as a mutual fund or a hedge fund. Because the transactions of these big shareholders often involve a far greater number of shares than those of the insiders who do show more insight — officers and directors — the raw sell-to-buy ratio is heavily dominated by insiders with the least forecasting ability. For example, Seyhun found that far from being a laggard, the average stock sold by these largest shareholders actually outperformed the market by 0.7% over the subsequent 12 months. The current message of the insider data “is as pessimistic as I’ve ever seen over the last 25 years.” Prof. Nejat Seyhun For his calculation, Seyhun strips out the largest shareholders from the sell-to-buy ratio. Currently that adjusted figure shows a record level of insider bearishness. According to this measure, corporate officers and directors in recent weeks have sold an average of six shares of their company’s stock for every one that they bought. That is more than double the average adjusted ratio since 1990, which is when Seyhun’s data begin. One year ago, Seyhun’s adjusted ratio was solidly in the bullish zone, he says. And in late 2003, the ratio was more bullish still. The current message of the insider data “is as pessimistic as I’ve ever seen over the last 25 years,” he says.
Posted on: Sun, 16 Mar 2014 11:37:19 +0000
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