For six months now, investors have been riding the wave of the market rally, watching their portfolios recover from the carnage of 2008. Rather than hoping that the market could somehow get all the way back to its record highs, however, those in the know are taking their money off the table with a sigh of relief.

What insiders are up to
Few things give investors more confidence than seeing corporate executives own a substantial amount of stock in their companies. Although every top-level executive will claim to act in the best interest of shareholders, those who are willing to buy and hold company shares give the added reassurance of putting their money where their mouths are.

In addition, because high-level managers and directors know a lot more about the companies they work for than the average investor, the moves they make in their own stock can signal changes in their confidence level about the company. That's why many investors look closely at insider trades to try to determine the direction of the stock as well as the company's prospects.

Right now, after one of the biggest rallies in stock market history, a lot of corporate insiders are taking some sizable profits. As an example, the companies below have some of the largest net insider sales in dollar terms since March:

Stock

Net Insider Sales Since March

Return Since March

AutoZone (NYSE:AZO)

$190.4 million

1.9%

Wynn Resorts (NASDAQ:WYNN)

$121.3 million

150.4%

Gap (NYSE:GPS)

$88.1 million

85%

Stryker (NYSE:SYK)

$72.9 million

22.7%

Apple (NASDAQ:AAPL)

$58.3 million

85.1%

Bed Bath & Beyond (NASDAQ:BBBY)

$53.5 million

66.9%

News Corp.

$22.2 million

89.6%

Source: Capital IQ, a division of Standard and Poor's. Figures are for six months ended Sept. 1.

Judging from these numbers, you'd think that insiders were anticipating that the rally must be about over. So has the pullback in the stock market over the past few days just been the beginning of a much larger move down?

Jumping to false conclusions
Unfortunately, insider sales aren't nearly as useful in predicting coming downturns in stocks as you might think. Insider purchases do a pretty good job of signaling good prospects for stocks down the road. But sales by insiders don't always mean much.

The primary reason for that discrepancy comes from the motivation behind insiders buying or selling stock. Any insider who buys shares has one major possible motivation: They think that the stock is going to rise, and so they want to reap the resulting profits. From their purchases, you can infer that they're positive about their company's prospects.

With insider selling, though, there are many different possible reasons behind a sale. Certainly, insiders may believe that the stock is going to tank and therefore want to secure their wealth before it disappears. But they may also simply want cash for living expenses or to diversify their investment portfolios.

For instance, the company with the greatest amount of net insider sales, Microsoft (NASDAQ:MSFT), appears at the top of the list primarily because Bill Gates regularly sells $200 million or more in shares every quarter. Gates isn't timing the market; he's just divesting himself of a large stake in Microsoft in an orderly fashion, regardless of which direction shares happen to be moving at any particular moment.

In fact, there's some evidence that insider sales can actually be a positive sign. If insiders with substantial stakes in the company make small sales for liquidity purposes, then the fact that they're hanging onto the vast bulk of their holdings means that they still have confidence in their company. By selling as little as possible to fund their needs, they will still benefit if their remaining shares do well.

Keep your eyes open
Just because insiders are dumping shares doesn't automatically mean you should. Regardless, although insider selling can occur for a variety of reasons, it's still worth paying attention to and looking for patterns of insider sales among the stocks you own in your portfolio. Once you get to know the typical sales that insiders make on a regular basis, you'll know when a transaction is out of the ordinary -- and those sales may give you the signal you need to sell your own shares before a big drop.

Fool co-founders Tom and David Gardner count insider ownership among the qualities you should look for in the best stocks. Take a look at all of their recommendations in their Motley Fool Stock Advisor newsletter -- a free 30-day trial is yours for the asking.

Fool contributor Dan Caplinger watches insider trades like a hawk. He doesn't own shares of the companies mentioned in this article. Apple and Bed Bath & Beyond are Motley Fool Stock Advisor recommendations. Microsoft and Stryker are both Inside Value picks, while Bed Bath & Beyond is a former one. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy takes stocks to the dump but still keeps that clean, fresh scent so many women love.