Corporate Insiders Still Majorly Bullish

Corporate Insiders Still Bullish: They've Cut Back Selling, Accelerated Buying

By Mark Hulbert, Marketwatch | 19 October 2008

ANNANDALE, Va. (MarketWatch)— Whatever else you might say about corporate insiders, they sure have the courage of their convictions. Not only have they, on balance, behaved bullishly over the last year, they have become even more bullish as the stock market has declined. By last week they had become positively exuberant. That is noteworthy. At similar stages of other bear markets in which the insiders were incorrectly bullish, the insiders were behaving much more bearishly.

Consider the latest insider data, courtesy of the Vickers Weekly Insider Report. In the week that ended Friday, according to Vickers, insiders bought nearly two shares of their companies' stock for every share they sold. That's significant, because the usual pattern, even in bull markets, is for insiders to sell more than they buy. In fact, according to Vickers, the long-term historical average is for insiders to sell between two and two and one-half shares for every share they purchase.

But not last week, the one-year anniversary of the bear market that began in October 2007. According to Vickers, insiders on average sold just 0.59 shares last week for every one that they bought. The sell-to-buy ratio was even more bullish for insiders of companies whose shares are listed on the NYSE or the AMEX: 0.37 to 1. Both of these readings are the best in nearly a decade, Vickers reports.

The comparable ratios for the week in October 2007 that included the all-time high, in contrast, were 4.0-to-1 for all companies and 1.89-to-1 for exchange-listed stocks. So, over the past year, the sell-to-buy ratio has fallen dramatically. To put that into historical context, it's worth being reminded that insiders did just the opposite during the first year of the 2000-2002 bear market. For the week that ended March 12, 2000, the week in which the NASDAQ Composite Index hit its all-time high above 5,000, the insiders' sell-to-buy ratio was 0.77-to-1. One year later— the week ending March 18, 2001, to be exact— the insiders' sell-to-buy ratio stood at 3.21-to-1.

So, even though insiders were too bullish at the March 2000 top, within one year they had markedly increased the pace of their selling. That's just the reverse of the trend over the last year. Another bullish straw in the wind, according to Vickers: Last week's particularly low sell-to-buy ratio did not result from a mere reduction in selling. The low ratio also was the result of acceleration in the pace of insider purchases.

That's significant, because the transactions that are reflected in the Vickers data are made in the open-market at the prevailing price. No one forced insiders to step up to the plate last week and buy more of their companies' shares with their own money. But they did. "It seems that insiders who were on the sidelines are now pouncing on the opportunity to add to positions as valuations have reached levels which, in some cases, have not been seen in decades," Vickers wrote.

For the record, however, I should stress that even when the insider consensus turns to be correct in forecasting the overall market's direction, it often is premature. This no doubt is due, at least in part, to the fear that insiders have of being accused of acting immediately prior to good or bad news about their companies being made public. To immunize themselves from that charge, they tend to act early. Some studies, in fact, have found that they anticipate what's happening to their companies' stock prices up to one year in advance, if not more.

So even if you are inclined to believe that the insiders are going to be right this time, it doesn't necessarily mean that the bear market that began a year ago is now over. The stock market forecast that is implicit in the current insider data is that the market will be higher in a year's time, regardless of the path that the market takes to get there.

[ Normxxx Here: I think they just follow a pattern of "Buy low, sell high." It just seems like they are anticipating the market because this is just the reverse of what the average market maven does and it pretty much ties in with the markets "LT" swings (months to years).   ]

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Normxxx    
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