Insiders flee stock markets

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.

  • Pwyaŵyr

    I’m new to this publication, so is it usual to present two opposing views? As in this post “Insider sales are another sign that this five-year rally may be on borrowed time”, and this week’s cover story : Hold your nerve – The best of the bull market is yet to come, 6 June 2014 / Issue 694. “We’re just at the start of the next big boom, say Akhil Patel and Phil Anderson”.
    This way you have your cake and eat it: whatever happens, you’ve predicted it, or warned about it. MoneyWeek should do better.

  • KaneDavid

    I agree and was thinking the same thing about this weeks publication.

    Its cover article offers an opinion that is at odds with the majority of information coming from money week. To change to an opposite prediction on the stock market so swiftly leaves me somewhat disillusioned at all of the advice coming from this magazine. Two strong views on opposite outcomes of the same subject tempts me to think as you do and that I should apply my subscriptions elsewhere.