Should You Sell Everything Now?

The market always has its share of Chicken Littles. Unfortunately, more of today's cluckers hold positions of authority in the stocks you own.

A recent study from TrimTabs Investment Research found that insider selling in August "surged to $6.1 billion," the highest total since May 2008 -- months before Fannie Mae and Freddie Mac failed, kicking off what would become the biggest financial story in 50 years.

Worse yet, for every insider bullishly buying, there were 30.6 sellers. "The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon," said Charles Biderman, CEO of TrimTabs, in a press release.

Chicken Little feed
Yikes! Yet there are two problems with using insider data as a leading indicator:

  1. Most of it is mishmash, such as options selling.
  2. What isn't mishmash can be misleading.

TrimTabs, for its part, told me that its analysts are careful to track only what's meaningful. "When we report on form-4 data, we only count open market transactions of common stock by officers and directors (no option / no 10b5 – 1 sales)," a TrimTabs spokesperson wrote to me via email. "We restrict the data to what we believe are the 'highest-signal value' transactions."

That's consistent with my own style of insider analysis. Interestingly, I'm finding more reasons to be bullish than bearish:

Company

Report Issued

Net Buying (Selling) In Year Prior to Report

Rating

Akamai

June 24

$1.63 million

Bullish

Activision Blizzard (Nasdaq: ATVI  )

July 21

($162.5 million)

Modestly Bullish

Garmin (Nasdaq: GRMN  )

July 23

$1.54 million

Modestly Bullish

Intuitive Surgical

July 28

($7.57 million)

Neutral

E*TRADE (Nasdaq: ETFC  )

July 30

$0.198 million

Bullish

Green Mountain Coffee (Nasdaq: GMCR  )

Aug. 5

($35.2 million)

Modestly Bearish

Microsoft

Aug. 18

($1.66 billion)

Modestly Bearish

ExxonMobil (NYSE: XOM  )

Aug. 21

($1.18 million)

Modestly Bullish

Sunoco

Aug. 25

($3.8 million)

Very Bullish

Yahoo! (Nasdaq: YHOO  )

Aug. 28

$66.9 million

Bearish

Source: Capital IQ, SEC filings, and author's estimates.

The difference? I've surveyed only a handful of stocks. TrimTabs is studying the entire market, and not just the insider action. Once more from the press release:

The TrimTabs Demand Index, which tracks 18 fund flow and sentiment indicators, has turned very bearish for the first time since March. For example, short interest on NYSE stocks plummeted by 10.3% in the second half of July and margin debt on all US listed stocks spiked 5.9% in July, while 51.6% of advisors surveyed by Investors Intelligence are bullish, the highest level since December 2007. "When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock," said Biderman.

A borrowing blunder of big proportions
Fair point. My own research shows that insiders have been borrowing to buy for far too long. You know their names. Green Mountain's Robert Stiller makes the list, as does Oracle chief executive Larry Ellison. Were either of these major shareholders to suffer a margin call, the short-term consequences for everyday shareholders could be devastating. TrimTabs is right to warn us.

But is the sky really falling? I'm skeptical. Not all insiders are selling, and those who've been buyers in recent months -- such as Marvel Entertainment's (NYSE: MVL  ) David Maisel -- are now sitting on huge gains. There's money to be made in every market.

But that's also just my take. Now it's your turn to weigh in. Are insiders dumping at precisely the right time, or is Chicken Little clucking a bit too loud? Please take a moment to vote in the poll below, and then leave a comment explaining your rationale.

Activision Blizzard and Marvel Entertainment are Motley Fool Stock Advisor selections. Garmin is a Motley Fool Global Gains pick. Akamai, Green Mountain Coffee Roasters, and Intuitive Surgical are Motley Fool Rule Breakers recommendations. Microsoft is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Marvel and stock positions in Akamai, ExxonMobil, and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is hosting a clearance sale on Friday. Please stop in for low, low prices on all its disclosure-y goodness.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 09, 2009, at 3:46 PM, baker018 wrote:

    Those who bought their positions when the market hit bottom in March can safely hold those stocks. I am of the belief that the market will revisit those lows by November 09 and investor equity will be wiped out again. Only after we reach the bottom of a w chart will it be safe to invest in stocks and China will lead the way.

  • Report this Comment On September 09, 2009, at 3:52 PM, hierofalcon wrote:

    As always, it's a market of stocks.

    There is a large amount of money that is still sitting in low rate of return vehicles that could propel stocks much higher if people get over the fear factor induced from the decline in the past year+. The rapid rise doesn't necessarily help with people's fear factor but does foment the "I'm missing the rally or the why did I sell at the low" component of market psychology.

    On the other hand, there are a lot of professionally managed positions that started out around Feb/Mar lows that have a really good rate of return, and there is a pre-disposition to lock in those gains and relax for a few weeks, especially the fall months that are for better or worse on people's minds.

    I'm in the middle. I've moved some money out of stocks that have had quite a rise, and into some that seem to have more headroom to rise. I'm also looking to begin raising my cash positions, but that is from an almost 100% invested state throughout the most recent market debacle.

    The list of stocks in my value screen keeps shrinking which tends to indicate the market as a whole is somewhat over-bought. I expect that it will grow to include more names in the near future, so having some cash available to take advantage of that seems prudent rather than overly cautious.

  • Report this Comment On September 09, 2009, at 4:12 PM, plange01 wrote:

    this is probably a last chance to sell off any stocks with buig gains for the next few years!the US is now over 9 months into a depression and it is in far worse shape than it was this time last year...

  • Report this Comment On September 27, 2009, at 11:30 PM, mariocavolo wrote:

    Again, only a MORON would jump into this market now...the timing could not be worse....Cheers, Mario, www.mariocavolo.com

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