While investors party like its 1999, Insiders are selling stock like there’s no tomorrow. Is a crash imminent?

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Corporate insiders have proprietary information about their companies. That’s why the SEC requires insiders — officers, directors and 10% holders of any publicly traded company — to disclose all trades in their own stocks. Insiders are prohibited from trading on “material, non-public information.” Nonetheless, many studies have shown there’s an insider trading “anomaly.” When corporate insiders trade in their own stock, unusual price changes are more likely going forward. So if insiders are selling stock at a record pace, maybe the stock market is poised for a drop.

Keep in mind that corporate insiders are prevented by the “short-swing profit rule” from profiting from short term trading. SEC regulations require insiders to return to their company any profits made from the purchase and sale of a company stock if both transactions occur within a six-month period. So insiders aren’t day traders, they’re long-term investors. In fact, given their intimate involvement in the day-to-day business of their companies, insiders are renowned value investors. An insider buys when his or her stock’s price is cheap relative to the company’s private market value. And they tend to sell when their stock is richly priced relative to fundamentals. Presumably, like now.

WhaleWisdom.com tallies the weekly buying and selling of officers and directors at U.S. public companies. (10% holders, considered insiders by the SEC, tend to be hedge funds, and aren’t typically privy to boardroom secrets. So their transactions are not included in WhaleWisdom’s weekly Sell vs Buy indicator.) As you can see below, the ratio of selling to buying has spiked higher in recent weeks.

Recent WhaleWisdom Insider Weekly Sell vs Buy ratios have eclipsed the highest levels since 2008.

WhaleWisdom Weekly Insider Sell vs Buy Ratio since 2018.

Let’s zoom out even further, back to 2008. We can see that recent Insider Weekly Sell vs Buy ratios have eclipsed the highest levels previously attained — in Feb. of 2013 and Jan. of 2014.

WhaleWisdom Weekly Insider Sell vs Buy ratio dating back to 2008. The three highest readings have occurred so far in 2021.

Insiders sell shares for many reasons unrelated to their outlook for their company’s stock.

The problem, of course, with using insider selling as a predictive indicator is that when insiders sell stock, it’s often for reasons that have nothing to do with their expectations for their stock’s performance. Insiders may sell because they are raising cash for a purchase, paying for a child’s education, going through a divorce, etc. Also, many insiders are compensated via stock options in their companies — exercise and sale of those options does not typically imply a negative opinion of their company’s stock. Rather, the insider is essentially cashing in stock granted as employment compensation.

Conversely, insiders buy there own stock pretty much for one reason. They believe their stock is a good investment. It follows that spikes in aggregate insider selling are not very predictive. But exceptionally low insider Sell vs Buy ratios are associated with bear market bottoms and positive returns going forward.

On March 25 we published this article highlighting historically heavy insider buying.

Of course, we don’t really need data that insiders are heavily selling stock to confirm the obvious: Stocks are in a very speculative phase, with some sectors reaching bubble status. Will things end like the 1929 crash or the dot-com collapse of 2000, when the Nasdaq lost nearly 80% of its value over the course of 2 1/2 years? Shine up your crystal ball. But don’t look for aggregate insider selling behavior to offer much guidance.

Contact Mark about investing based on SEC filings and smart money disclosures.

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