Insider Selling Spikes: Sign of an Airy Market?
Although all market declines are preceded by bearish ratios, not every bearish ratio predicts a decline.
Insiders, like every other investor, have enjoyed the 9% rally in the market since President Donald Trump was elected. Given the spike, it isn’t entirely surprising that they are reaping the fruits of their gains, but lately they have been selling in droves.
Indeed, in the week that ended Feb. 24, there were 188% more companies with open-market sales than purchases, a ratio not reached since December 2013, according to Insiderinsights.com, which tracks such statistics. The following week, the ratio totaled 143%. While that isn’t necessarily predictive of a market swoon, it does bear watching.
“Although strong market declines are preceded by bearish insider ratios, not every bearish ratio is predictive of a decline,” says Jonathan Moreland, director of research at Insiderinsights.com. But he notes that the December 2013 spike in the ratio was followed by a flattening of the market after a huge surge, and then a notable dip in early 2014.
Of somewhat greater concern to Moreland is the strong recent rise in volatility, which indicates a lack of conviction by executives. In fact, the only time his indicator has been this volatile was “sometime leading into the 2008 market decline,” he says.
Given that worrying trend, Insiderinsights.com has advised investors to raise their level of cash to 20% from 10%. But the outfit still recommends overweights in banks, biotechs, basic materials, and infrastructure.
That said, Moreland concedes that the market “does look airy.” Consider yourself warned.