By: Spencer Israel
The headline sounds ominous. “Insiders are selling stock like it’s 2007.”
According to TrimTabs Investment Research, a firm that tracks market liquidity and flows, C-Suite executives sold an average of $600 million of stock per day through the first three weeks of August. That rate put August on track to be the fifth month of 2019 in which insider selling topped $10 billion. The last time there was a year in which insiders sold at least $10 billion in five different months? 2007.
Rewind the clock 12 months, and there’s that headline again: “With September not yet over, stock sales by company executives reached $5.7 billion…the highest September in a decade. August’s $10.3 billion in insider sales also reached a 10-year record.”
You see a pattern here.
The implication, of course, is that the last time insiders sold this much stock, a global crisis soon followed.
But while those headlines are technically correct, there are several reasons why the actual data point—increased insider selling—is a little less direful than the headlines indicate.
Reason #1: Insider selling is very different from insider buying
There is only one reason why a corporate insider would buy more stock: they believe in the story. Maybe they’re defending it from an activist short seller, or maybe they’re just adding to their portfolio, but you buy because you believe. End of story.
Selling on the other hand, is not so simple. There are any number of reasons an executive would sell shares. Maybe it’s to fund a charitable cause, as Mark Zuckerberg is doing. Or to fund another business venture, like Jeff Bezos.
Insiders could sell for tax purposes, fund a new purchase, or to simply rebalance their portfolio. In some cases, such as Beyond Meat, the executives are likely selling to cash in on a big move in their stock.
Could an insider sell because they don’t believe in their own story? Sure. But the bottom line when it comes to insider selling is, we don’t know why.
Reason #2: The market does not react to insider selling in the same way
Because buying is interpreted as an endorsement, insider buying is usually a catalyst for stocks to move higher. But insider selling does not have that same effect.
Dennis Dick, a proprietary trader at Bright Trading, has observed this. “There’s only one reason you buy stocks — you’re speculating on your stock going higher,” Dick said. “Executive buys move the price up often. Executive sells don’t move the price down very often.
“When a stock is really in the dumpster…and then you get some [executive] buys, that’s when the market takes note and that’s when you can see these stocks really turn,” he said.
The Bottom Line
It’s possible that increased insider selling could be a signal in the short term.
WhaleWisdom Alpha noted that the last time that the ratio of insider sells to insider buys was so skewed towards the sell side was January 2014. In that month, the S&P 500 dropped 6% (it finished the year up 12%).
And while that 10-year high in insider selling last September did proceed the market’s worst quarter since 2011, major averages are pretty much at the same levels they were at a year ago in spite of the trade war, inverted yield curve, and falling interest rate environment.
If insider selling is a glaring warning sign, the market sure seems to be ignoring it.
So, when you see that an insider has sold, ask yourself these questions:
Insider selling is but one of thousands of indicators. Could it be possible that these insiders can see the stormy clouds that we can’t? Yes. But don’t count on it predicting the next recession.
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