Insider Selling Reaches 25-year High as Smart Money Dumps Stocks Before The Coming Crash

Ever noticed how a few smart entrepreneurs always manage to sell out in a boom before the bust? In the stock market this is even more apparent and surprise, surprise, insider selling always reaches a climax just before the crash.
The adjusted 25-year high insider index is flashing red right now. It’s a leading indicator, and usually signals imminent danger.
Mark Hulbert of Hulbert Financial Digest concludes: ‘There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today — early 2007 and early 2011.
Danger signal
‘The first came a half a year before the beginning of the worst bear market since the 1930s. While the market didn’t fall as much following the second of these two instances, the May-October decline in 2011 did satisfy — based on intraday levels of the S&P 500 index — the semi-official definition of a bear market as a 20 per cent drop.’
After all, who knows more about a company and its business than the people running it? Or at least they ought to. Profits today reflect orders taken many months ago, and executives know from their order books when things are starting to go awry.
This is perfectly legal. Executives are only guilty of a wrongful insider transaction under US law if they act on information that should first have been disclosed to the public, such as an earnings announcement or takeover deal.
Insider selling is currently highest in capital goods, technology, consumer durables (such as automobiles, construction and appliances) and consumer non-durables (food and beverages, clothing and tobacco). It’s lowest in energy, industrials and financials, though you have to wonder how the banks would hold up if stocks really took a dive.
Profit forecasts
It would be very interesting to read a covert survey of how insiders currently view the profits’ outlook for their own companies. That’s probably the main reason for them selling out.
Stocks, investors should recall are valued in terms of multiples of their future profits. If the company profits are heading down, so are their share values. Profit multiples that are applied to reach valuations also looked stretched by comparison to stock market history.
Selling out when your company is trading at peak profits and overvalued by the market always makes good business sense. For how long will it be before that opportunity comes again, if it ever does?
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Ever noticed how a few smart entrepreneurs always manage to sell out in a boom before the bust? In the stock market this is even more apparent and surprise, surprise, insider selling always reaches a climax just before the crash.

The adjusted 25-year high insider index is flashing red right now. It’s a leading indicator, and usually signals imminent danger.

Mark Hulbert of Hulbert Financial Digest concludes: ‘There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today — early 2007 and early 2011.

Danger signal

‘The first came a half a year before the beginning of the worst bear market since the 1930s. While the market didn’t fall as much following the second of these two instances, the May-October decline in 2011 did satisfy — based on intraday levels of the S&P 500 index — the semi-official definition of a bear market as a 20 per cent drop.’

After all, who knows more about a company and its business than the people running it? Or at least they ought to. Profits today reflect orders taken many months ago, and executives know from their order books when things are starting to go awry.

This is perfectly legal. Executives are only guilty of a wrongful insider transaction under US law if they act on information that should first have been disclosed to the public, such as an earnings announcement or takeover deal.

Insider selling is currently highest in capital goods, technology, consumer durables (such as automobiles, construction and appliances) and consumer non-durables (food and beverages, clothing and tobacco). It’s lowest in energy, industrials and financials, though you have to wonder how the banks would hold up if stocks really took a dive.

Profit forecasts

It would be very interesting to read a covert survey of how insiders currently view the profits’ outlook for their own companies. That’s probably the main reason for them selling out.

Stocks, investors should recall are valued in terms of multiples of their future profits. If the company profits are heading down, so are their share values. Profit multiples that are applied to reach valuations also looked stretched by comparison to stock market history.

Selling out when your company is trading at peak profits and overvalued by the market always makes good business sense. For how long will it be before that opportunity comes again, if it ever does?
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