Company directors are selling in droves – so should you

Investors wondering how much further the recent stock market rally can go might want to look at what company directors are doing. And then sell.

People pay attention to directors’ share deals. After all, as legitimate insiders, they should know better than anyone else exactly how economic conditions are affecting their firms.

The bad news for bulls is that right now they seem pretty nervous.

Selling by directors has recently hit its highest level in more than a year. In August, company directors sold $6.2bn-worth of shares, the most since May 2008. Meanwhile, says research firm Trimtabs, total insider buying – directors snapping up stock – has been below $1bn for seven straight months.

Sure, there are many reasons why directors sell – they might need the money for school fees or that second yacht. Some may even be forced into selling to meet margin calls on other investments or to fund a tax bill.

However, other indicators also point to markets looking over-priced – for example, the Shiller price / earnings ratio for the S&P 500 (which compares share prices to average earnings over the past ten years) is now at 20, against a long-term average of just 15. So it’s not too much of a stretch to conclude that most directors are selling for no other reason than that they think share prices are heading for a fall, and they want to cash in while the going’s good.

Investors who have ridden the recent rally, particularly those with money in cyclical stocks, should consider following suit.