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:
- Most of it is mishmash, such as options selling.
- 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 |
$1.63 million |
Bullish |
|
|
Activision Blizzard |
($162.5 million) |
Modestly Bullish |
|
|
Garmin |
$1.54 million |
Modestly Bullish |
|
|
Intuitive Surgical |
($7.57 million) |
Neutral |
|
|
E*TRADE |
$0.198 million |
Bullish |
|
|
Green Mountain Coffee |
($35.2 million) |
Modestly Bearish |
|
|
Microsoft |
($1.66 billion) |
Modestly Bearish |
|
|
ExxonMobil |
($1.18 million) |
Modestly Bullish |
|
|
Sunoco |
($3.8 million) |
Very Bullish |
|
|
Yahoo! |
$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
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.
