According to the Vickers Weekly Insider Report, published by Argus Research, this sell-to-buy ratio, when applied to transactions over the previous eight weeks, is higher than average but no higher today than it was one year ago — when the S&P 500 SPX -0.28% was poised to produce an impressive double-digit gain.
And in late 2003, just as the 2002-07 bull market was gathering steam, the insiders’ sell-to-buy ratio rose to even higher levels than it is today.
But this measure is misleading, says Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider behavior. That is because it uses a government definition of insiders that includes a group of investors whose past transactions, on average, have shown no correlation with subsequent market moves: those who own more than 5% of a company’s shares.
Though on rare occasions a large shareholder also will be an officer or director, in almost all cases it will be an institutional investor — such as a mutual fund or a hedge fund.
Because the transactions of these big shareholders often involve a far greater number of shares than those of the insiders who do show more insight — officers and directors — the raw sell-to-buy ratio is heavily dominated by insiders with the least forecasting ability.
For example, Seyhun found that far from being a laggard, the average stock sold by these largest shareholders actually outperformed the market by 0.7% over the subsequent 12 months.
The current message of the insider data “is as pessimistic as I’ve ever seen over the last 25 years.”
Prof. Nejat Seyhun
For his calculation, Seyhun strips out the largest shareholders from the sell-to-buy ratio. Currently that adjusted figure shows a record level of insider bearishness. According to this measure, corporate officers and directors in recent weeks have sold an average of six shares of their company’s stock for every one that they bought. That is more than double the average adjusted ratio since 1990, which is when Seyhun’s data begin.
One year ago, Seyhun’s adjusted ratio was solidly in the bullish zone, he says. And in late 2003, the ratio was more bullish still.
The current message of the insider data “is as pessimistic as I’ve ever seen over the last 25 years,” he says.
There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today — early 2007 and early 2011. 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 semiofficial definition of a bear market as a 20% drop.
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