Monday, October 1, 2012

Insider Warning

It's not too late to trim stock holdings and raise cash.

The latest warning is from corporate insiders, who have been selling their own company shares at an extraordinarily heavy level.  

Insiders typically sell far more shares than they buy, as executive compensation usually has a large stock component.  Some shares are necessarily sold to raise cash for income tax payments, others for family expenses such as tuition, and some for prudent estate planning.  

The typical range of sales to purchases by corporate insiders in aggregate is from 12:1 (twelve times as many of their own company's shares sold as purchased) to 20:1 (twenty times as many shares sold as purchased).

When the ratio of insider sales to purchases is less than 12:1, it is considered bullish for the stock market, since insiders are selling relatively less of their own company's shares.  (The insiders are assumed to be optimistic about the prospects of their company's shares.  Why would they sell if they think the stock is going up?    

Conversely, when the ratio of sales to purchases exceeds 20:1, it is considered bearish for stocks, as insider selling is relatively heavy.  (The insiders are assumed to be more pessimistic about the prospects of their own company's shares.  If they are selling to an unusually large extent, they must think that the stock is overpriced and likely to decline.)

The latest reading showed aggregate insider sales to purchases to be more than 40:1.  The message from corporate insiders is caveat emptor (let the buyer beware)!

Steve Lehman

 S & P 500:  1444

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