Andrew Postelnicu Reports on Insider Sales

Daniel Gross makes the catch:

Daniel Gross : Andrew Postelnicu reports in the Financial Times that corporate insiders are dumping shares.

Selling of US stocks by company officers, directors and other insiders last month reached the highest level since just before the bursting of the dotcom bubble, data showed. Thomson Financial said insider selling reached a total of $6.1bn in February, the highest since the $9.1bn record set in February 2000. High levels of insider activity are viewed as indicators of turning points in the market, and many investors incorporate the data into their market analysis. Mark LoPresti, analyst at Thomson, said the data fitted within historical patterns of spikes in insider activity from January to March. He said a further increase in March could be more meaningful because insider activity had generally decreased during this month.

The biggest Wall Street companies saw the highest levels of insider selling, Thomson said, with sellers outnumbering buyers by four to one. George Muzea, who runs an investment research firm focused on insider activity, concurred with that finding. "The lack of insider interest in large caps does not bode well for some of the larger indexes, such as the S&P 500," Mr Muzea said. "In our opinion, from an insider perspective, it makes sense to consider . . . S&P 500 for short [calls]." Mr Muzea added that investor sentiment still indicated more bulls than bears in themarket. The reverse had not occurred since October 2002, he said.

Comments

[liberal]

Isn't there some academic study claiming that insider purchases are more meaningful than insider sales?

[Matthew Saroff]

Holy shit.
It's going to get ugly fast.

[Maria Bartiromo]

They are just rebalancing their porfolios!

This is a great buying opportunity!

[sd]

Ah, more hoo-ha from the ever-excitable Daniel Gross.

Yes, insider sales are at their "highest level since just before the bursting of the dotcom bubble." The S&P 500 is also, as it turns out, at roughly its highest level since just before the bursting of the dotcom bubble. The former fact is simply a reflection of the latter fact. When stocks are more expensive, the dollar value of stock sales will be high.

If anything I'm cheered by the fact that insider sales are only at 2/3 of the pre-bubble level, while the overall market is at roughly 85% of its pre-bubble level. That is, the value of insider sales as a percentage of overall market cap is far lower now than in the pre-bubble period.

I like slate.com a lot. But the replacement of James Surowiecki by Daniel Gross a few years ago was one of the most salient examples of journalistic trading down I've ever seen. Gross is, simply put, a superficial thinker.

[david]

Wow, called a superficial thinker in comparison with Surowiecki. That stings.

[Tad Brennan]

That's it. I'm selling all my stocks.

Of course, I have never been able to buy any stocks.

Still. It's the principle of the thing.

[RW]

A minor nit, or slip in Daniel Gross's catch if you like, the cited article is by Andrei Postelnicu, not "Andrew" - a very sharp FT stringer, originally from Romania.

[anne]

Suppose insider selling was 20% higher or lower, or 30% or 40%. What am I supposed to do with such information? Should I be buying and selling the market as insider selling bounces? How high? What index? I have no idea what such an article might mean or how to possibly use such information to time the market, which strikes me as generally absurd for investors in any event.

[kharris]

Hi, Anne. True that investors for the longer term would probably have trouble using this information. Heck, the comparison to prior January-February periods, along with sd's math, suggests that there may not be much to the numbers, anyway. But think about what CNBC does day in and day out. Think of all those reports and news letters flying into e-and-snail mail boxes. There is apparently a huge audience for financial market information that is no help to investors.

[Larry]

If insiders are selling and, according to the post below, foreigners are buying.... do we assume that the fools are the Americans, who mismanage their economy? Or the foreigners, who are our creditors?

And related question: Which industries will be most threatened by a dollar readjustment?

[anne]

K Harris

"There is apparently a huge audience for financial market information that is no help to investors."

Precisely and decidedly so, a scathing comment about the selling of information to professional investors that is of no use even to professional investors but happily adds to the final cost of investing and clouds the decision making process allowing for higher margins.

[anne]

A dollar adjustment, implies a relative decline in the value of the dollar though interestingly the dollar is valued slightly higher now than 10 years ago. but, a decline in the value of the dollar should in time be helpful for American exporters and unhelpful to importers. As for investors, international holdings are a hedge against a weaker dollar though hedges can take a surprisingly long time to be worth the while :)

[The Unknown Professor]

Liberal:

I've done a litle bit of work in this area, and you're right - there are quite a few studies showing that insider purchases are much more informative than insider sales. The main reason for that is that insoders can sell for a number of reasons - rebalancing their portfolio, cacpitalizing on options that have scome due, needing cash to pay for a new Porsche for Junior, etc..).

However, insiders tend to purchase stock only when they have information that the stock ins undervalued. So the signal associated with purchases is much clearer.

Seyhun (at the University of Michigan) is pretty much the acknowledged "big dog" of research in this area. He's written a pretty good book on using insider information to make investment decisions, titled "Investment Intelligence from Insider Trading". It draws on much of the research in this area, but's written for the non-academic/non-practitioner in mind. It's also prett cheap (there are copies on Amazon for under $15).

I'm curious to know if insider purchases droppped off at the same time insider sales picked up. If so, it would be a much stronger signal. I don't have a subscription to Financial Times, so I don't know if they addressed this or not. If anyone has a copy of the article, please send it along.