Insider Selling

Insiders sell stock for many reasons. They have to pay school tuition or they buy a new house. When their stock options vest, they often sell to diversify their portfolio. Really, if it didn’t seem disloyal, insiders should be short their company stock because so much of their income is dependent on the health of the company that they work for that they should hedge some of the risk.

Since insiders are the best informed about their company, there are services that watch what they do. When they sell as a group, it is a bad sign.

This is from the Wall Street Journal:

Insiders are selling their company shares at a pace not seen in two years, providing further evidence that the recent stock-market rally may be coming to an end.

Insiders of S&P 500 companies have now been net sellers for 14 consecutive weeks, according to research firm InsiderScore.com. That marks the longest stretch since June 2007, which was just a few months before credit markets started shutting down and a bear market for U.S. stocks began.

Stock purchases by highly placed executives, such as chief executives and chief financial officers, has been a bullish metric in the past, suggesting a broad market rally was imminent. A wave of buying last November and early March each came right before more than a month’s worth of stock-market rallies.

But company executives have shifted from buying binges to selling splurges, suggesting insiders are questioning the recent three-month rally that has seen major indexes increase at least 30%. Insiders are collectively making a valuation call that their stocks have become too expensive compared to earnings expectations as the second quarter comes to an end, according to Ben Silverman, director of research at InsiderScore.com.

“Certainly within the insider community there’s some questioning of whether evaluations have peaked and whether this bull run is going to come to an end,” Silverman said.

Stocks experienced broad-based selling on Monday as the Dow Jones Industrial Average was recently down 169 points at 8371, adding to last week’s 3% drop.

With less than two weeks left in the quarter, Silverman said insider activity should start slowing down as companies generally close trading windows approximately a week before the quarter ends.