Monday, November 1, 2010

Insider Selling Volume At Highest Level Ever Tracked

Insider Selling Volume At Highest Level Ever Tracked

By John Melloy | 26 October 2010

The overwhelming volume of sell transactions relative to buy transactions by company insiders over the last six months in key leading sectors of the market is the worst Alan Newman, has ever seen since he began tracking the data. The editor of the Crosscurrents newsletter looked at insider trading activity amongst the top ten companies that make up the Nasdaq such as Apple [AAPL], Google [GOOG] and Amazon [AMZN]. Then he analyzed the biggest members of the Retail HOLDRs ETF like Gap [GPS], Target [TGT] and Costco [COST], as well as the top insiders in the semiconductor industry at companies such as Altera [ALTR], Broadcom [BRCM] and Sandisk [SNDK].

The largest companies in three of the most important leading sectors of the market have seen their executives classified as 'insiders' sell more than 120 million shares of stock over the last six months. Top executives at these very same companies bought just 38,000 shares over that same time period, making for an eye-popping sell to buy ratio of 3,177 to one. The grand total for the three sectors are "as awful as we have ever seen since we began doing this exercise years ago," said Newman, who was ahead on such trends as the dangers of high-frequency trading and ETFs before the 'Flash Crash'. "Clearly, insiders are seeing great value only in cash. Their actions speak volumes for the veracity for the current rally."

But the overall market doesn't seem to care. The S&P 500 is up 16 percent since its 2010 low hit on July 2nd on the back of strong earnings driven by cost-cutting and the hopes for even more quantitative easing from the Federal Reserve. The insider data "is good reason for considerable caution once the price action fades," said Simon Baker, CEO of Baker Asset Management. Still "insiders normally buy early and sell early too [[§othey traditionally sell into rising markets and buy into falling markets, on a proportionally increasing scale§c: normxxx]]. Longer term— 12 months out— it is more of a red flag."

Newman isn't alone in warning about insider selling. The latest report from Vickers Weekly Insider, a publication that makes investments based upon these transactions, shows that total insider sell transactions relative to purchases on the New York Stock Exchange are running at a ratio of more than four to one over the last eight weeks. The 'normal' reading, because of options selling and other factors, is about two to one, or two sales for every buy, according to Vickers.

To be sure, many investors feel the heavy insider selling is just an anomaly based on other reasons. "These are folks that have had to dip into their stocks for the first time in years, as their salaries have been cut and their bonuses, outside Wall Street, have been significantly curtailed," said J.J. Kinahan, chief derivatives strategist for TD Ameritrade. "This may speak more to a cash flow problem, then a market belief."

Still, Newman, who is also a favorite commentator of Barron's columnist Alan Abelson, sees the insider selling as just the latest reason to be cautious on the market— along with other reasons such as the mortgage foreclosure mess and fully invested mutual fund managers with no fresh powder to put to work. "At the risk of sounding like a broken record, we expect a significant correction," said the newsletter editor.



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