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Mix-Ansicht- Insider selling appears more bearish than it really is - Amanito, 12.04.2005, 21:06
Insider selling appears more bearish than it really is
-->Insider information
A good illustration of this is the current conviction that, because corporate insiders are selling shares of their firms' stock at above-average rates, the stock market should soon tank.
And insiders certainly are selling a lot more of their firms' stock than they are buying.
According to Vickers Weekly Insider Report, which collects and analyzes weekly insider data as reported to the Securities and Exchange Commission, corporate insiders over the past eight weeks have sold on the open market $3.90 worth of their stock for every $1 that they have purchased.
Though this is down from the sell-to-buy ratio in excess of 6:1 seen around the turn of the year, it still is significantly higher than the historical average sell-to-buy ratio of around 2.5:1.
Not surprisingly, therefore, almost all of the advisers I monitor who base their market timing on insiders' behavior have been largely out of stocks for some time now.
But there are at least two major problems with that conclusion, according to research conducted by University of Michigan finance professor Nejat Seyhun. The first is that not all insider selling is created equal.
The most bearish kind of insider selling, according to Seyhun, is that which occurs when their stocks are declining. It's very bad news indeed when insiders are eager to sell into a falling market.
But that is relatively rare. The more common pattern is for insiders to sell their stocks when the market is rising, and pull back when the market is declining. And that appears to be precisely what we have witnessed this year.
As Vickers noted Monday night in the latest issue of their newsletter,"Insider trading activity this week shows a continuing sensitivity to overall share prices. Since early march, the Dow Jones Industrial Average ($INDU: news, chart, profile) has dropped over 500 points. The ratio of insider selling [to insider buying] has fallen as well." Thus, even though the current ratio is above the 2.5:1 level that Vickers normally considers to be bearish, Vickers concludes that the current"scenario appears to offer investors the opportunity to add to their positions as market declines drag down individual stock prices from month to month."
The second problem with the bearish groupthink about insider selling, according to Seyhun, is that it fails to take into account the impact that options have had on insider selling patterns in recent years. The net effect has been to reduce dramatically the comparability of insider selling patterns of previous decades.
That's because the ratio of insider selling to insider buying focuses on open-market transactions. Shares purchased pursuant to exercising an option do not qualify. So as options have played an increasingly large role in executive compensation over the last decade, the sell-to-buy ratio has become more and more skewed.
Another factor that reduces historical comparability: Prior to the early 1990s, insiders were required to hold for at least six months any shares they acquired through option exercises. Since then, of course, insiders have been able to sell immediately any such shares -- reducing the bearish significance that such sales otherwise would have.
Taking these factors into account, Seyhun estimates that the normal level of the insider sell-to-buy ratio is now around 6.5:1, instead of 2.5:1. Because the current ratio is not above this level, he believes that the current data are no worse than neutral.
This isn't to say the market couldn't go down, of course. But it means that if it were to do so, it most likely would be for reasons other than insider behavior.
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