It’s widely accepted that company directors are best placed to gauge the prospects for their business. So if many insiders across the stock market are bailing out of stocks, it may be a sign that executives fear a downturn.
It’s worth bearing in mind that insiders sometimes sell stocks for reasons unrelated to their firms’ outlook, typically to raise some capital. Many are paid in share options, for instance, and will cash these in by selling stocks before the options expire. But even taking this into account, insider sales look worryingly high at present.
Wirtschaftswoche points out that in April the ratio of insider sales to buys in the US market reached a level that has been exceeded only twice – in early 2007 and early 2011. Both these occasions were followed by market declines a few months later.
Strip out sales related to cashing in options, and director sales haven’t been this high in
25 years. Sellers have outstripped buyers by six to one, compared to the typical ratio of three to one.
It’s a similar story in Europe. Patrick Hable of 2iQ-Research, which monitors European director sales, says sales are often high after a long rally, but the proportion of buyers compared to sellers is extremely low.
There are now 13 buyers for every 100 sellers. At the beginning of 2014, there were still 40. Anything below 20, says Hable, should ring alarm bells. Insider sales are another sign that this five-year rally may be on borrowed time.