Though their bearishness doesn’t necessarily spell an immediate end to the bull market, it can’t be good news — since insiders presumably know more about their companies’ prospects than do the rest of us.
Corporate insiders are a legally-defined group containing a company’s officers, directors, or shareholders owning at least 10% of its outstanding shares. Any time insiders buy or sell shares of their company’s stock, they must report the transaction more or less immediately to the SEC, which makes the data available to the public.
Supporting their argument is the ratio of the number of shares insiders have recently sold to the number recently bought. Lower ratios mean that the insiders on balance are bullish, while higher ratios mean they are more bearish. The historical average for this ratio, according to the Vickers Weekly Insider Report, a publication of Argus Research, is between 2-to-1 and 2.5-to-1.
At the top of the bull market in October 2007, just before the Great Recession and the worst bear market since the 1930s, this sell-to-buy ratio stood at a bullish 1.98-to-1.
That result certainly doesn’t provide much encouragement to those who would look to corporate insiders for guidance.
Note carefully that even if the insiders turn out to be right and the bull market is coming to an end, this doesn’t have to mean that the U.S. market averages are about to fall as much as they did in 2008 and early 2009. The one other time since that bear market when Prof. Seyhun’s adjusted sell-buy ratio sunk as low as it was in 2007 and is today, the market subsequently fell by “just” 20%.
That other occasion was in early 2011. Stocks’ drop at that time did satisfy the unofficial definition of a bear market, and the insiders’ pessimism was vindicated.
And though the 2011 decline wasn’t nearly as bad as the losses in 2008, corporate insiders’ latest behavior, properly interpreted, is worrisome.