MM Money

The Insiders Are Selling. But Is That So Bad?

Excerpt: NEW research shows that pessimists are on shaky ground when they argue that recent heavy selling by company insiders is a bearish sign for the stock market.

NEW research shows that pessimists are on shaky ground when they argue that recent heavy selling by company insiders is a bearish sign for the stock market.

Insiders, of course, are a company's officers, directors and largest shareholders. Laws require them to report to the Securities and Exchange Commission whenever they buy or sell shares of their company's stock. For decades, investors have paid close attention to what insiders at a business are doing, on the reasonable assumption that they know a lot more about its prospects than do the rest of us.

Many market timers, in particular, have paid close attention to the overall ratio of insider sales to purchases. Typically, they say it is a bullish sign whenever this ratio falls well below its several-decade-old average of around 2.5 to 1, and a bearish sign when it rises well above that average.

This indicator certainly looks bearish right now. The insider sell-to-buy ratio for trades over the last eight weeks is 5.51 to 1, according to the Argus Research Company of New York, which collects insider trading data from the S.E.C. and reports its findings in a newsletter, Vickers Weekly Insider Report. Largely because this ratio is more than twice the long-term average, Argus is decidedly bearish. For its newsletter's two model portfolios, the firm is recommending that investors hold no stocks at all.

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