MarketWatch’s Hulbert: High Insider Selling Ratio a Bad Omen for Stocks

Friday, 08 Feb 2013 09:04 AM

By Dan Weil

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Corporate insiders are selling their shares at the highest rate relative to purchases in 18 months, and that’s a danger sign for the stock market, says Marketwatch columnist Mark Hulbert.

The Vickers Weekly Insider Report calculates an insider-selling ratio, which represents the number of shares sold by insiders divided by the number bought by insiders.

For the week ended last Friday, this sell-to-buy ratio for shares listed on the New York Stock Exchange totaled 9.2-to-1, Hulbert writes. That level hadn’t been reached since July 2011.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

“This is worrisome because corporate insiders — officers, directors and the largest shareholders — presumably know more about their companies’ prospects than the rest of us do,” he says.

“If they were confident that the shares of their companies would soon be trading markedly higher, they wouldn’t be selling them now.”

Over the last 10 years, when the sell-buy ratio reached December’s level of 8.38, stocks on average fell 2.1 percent, as measured by the total return of the Wilshire 5000 index, Hulbert says.

After the last 9.2 reading 18 months ago, the Dow Jones Industrial Average slumped 2,000 points in the next couple of weeks. However, that was also when the U.S. Treasury’s credit rating was downgraded.

“In any case, … the high level of insider selling in December could very well have been caused in large part by the prospect of higher tax rates in 2013 — which would have prompted [insiders] to accelerate their sales. To the extent this was so, of course, the high sell-to-buy ratio at that time would have been a false signal,” Hulbert writes.

“Regardless, the sell-to-buy ratio today is even higher than it was in mid-December, and it can’t be discounted because of the immediate prospect of higher taxes.”

“In the past, this level of insider selling has been indicative of a coming downturn or at least a plateau in the market,” David Coleman, an insider trading analyst at Argus Research, which publishes the Vickers Report, tells CNNMoney.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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