Company insiders are selling their shares at the third-fastest rate in history. Historically, that's bad news for the stock market.
There’s an old Wall Street adage that they don’t ring a bell at the top, but corporate insiders do tend to ring the register at the right time.
Right now, corporate insiders are taking profits off the table, mere months after they got their most bullish in the past six years.
The ratio of insider sales to buys is a widely-tracked way to determine how bullish or bearish company insiders are with their shares.
This year has seen a massive swing in the index, as corporate insiders became bullish on their shares in March following a fast-and-furious 30% drop in the stock market. At the market bottom, company insiders reached the most bullish level last seen in March 2009.
Now, with the stock market back to breakeven, corporate insiders have stepped up their selling instead. That shows that some quick profit-taking is on the table, particularly for companies that have rebounded sharply from their lows.
The ratio of insider sales to buys is now the third-highest on record. The prior two times? The market sold off shortly after. While past performance is no indicator of future performance, human beings still tend to think in herds.
Best-case scenario: today’s high insider sales ratio could be an indicator that company insiders see little, if any, upside in their shares from here. That’s not the case for a sale, but it’s not the case to go long the market right now either.
Corporate insiders are often followed for their purchases. That’s because company insiders, particularly high-level players like the CEO and CFO, know their business inside and out. They know if they’re going to have a great quarter or even year.
When they buy their shares on the open market, it’s tracked and disclosed via the SEC Form 4 and public within days.
When it comes to insider sales, the reason isn’t as apparent. That’s because many companies provide employees with stock options.
When any single insider wants to sell at any company, it may not be because they consider shares overbought and expensive. They may need to meet a tax obligation, pay for a child’s education, a yacht, or a divorce.
So individual insider sales aren’t necessarily a sign to sell out too.
Nevertheless, when the total ratio of insider sales is high, markets tend to underperform thereafter.
Right now, company insiders across all sizes and sectors are cashing out.
“When the market is trading as it is, very close to all-time highs, it gives the optics that insiders don’t believe the market being at these levels,” says Robert Pavlik, senior portfolio manager at SlateStone Wealth.
That may not be a sign of an imminent crash again, but it does mean that investors should tread lightly, even in today’s high-flying market. They don’t ring a bell at the top, but corporate insiders are starting to cash in their chips.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 2:08 PM