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What Are Insiders Doing?

Posted by Larry Doyle on April 25, 2009 9:12 AM |

Who knows a business better than the executive in charge? Well, given the performance of many companies over the last few years many investors may wonder just how well the CEOs and board of directors know their own companies. That said, tracking “insider” activity is always prudent.

One should NEVER buy or sell a company stock based merely on “insider” activity. An individual executive may have personal financial reasons outside of his opinion on the company’s future to buy or sell the company stock. I have heard people make investment decisions based purely on insider activity and it is a mistake.  Even so, one should be aware of insider activity within a specific company as a potential indication of executive sentiment. How does it go? Money talks…..

While insider activity for a specific company can be subject to particular individual circumstances, it defies logic to think that insider activity taken in totality is not an indication of overall executive sentiment on the future of the economy and market.

What are insiders doing?  Bloomberg reports insiders are “taking chips off the table,”  Insider Selling Jumps to Highest Level Since 2007.  Does this mean the market is going down? Not necessarily. If information were available indicating executives were actually “shorting” the company stock specifically and the market as a whole, that would be highly interesting and very damning. No credible executive worth his salt would ever publicly acknowledge shorting his own stock. Plenty of unethical and unsavory executives have done that via disguised methods but the information is not readily available.

The Bloomberg analysis is reason to pause before aggressively entering the market at this juncture:

While the Standard & Poor’s 500 Index climbed 28 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.

“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.”

The market has obviously had a very nice run led by the tech heavy Nasdaq. Insider selling does not preclude the market from continuing to rally but it should not be ignored. While consumers largely continue to pull in their reins and pay down debt, many retail shops and regional banks are facing increased levels of defaults. Housing activity is showing signs of bottoming. Overall, the outlook for the economy is decidedly less bearish from a few months ago but anything but bullish. I more value insider activity at this juncture.

Which industries are leading the insider selling? Thank you Bloomberg:

Insiders of consumer and technology companies have been selling the most stock relative to the amount they purchased this month.

Don’t blindly follow insiders but also do not blindly follow the market.


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