Stocks represent a daily voting booth for company fortunes. Who better to access a company’s fortunes than those on the inside? One can track the investment activity of insiders to get an inside look at a particular company or look at insider activity in aggregate to get a view of stocks in general. What insiders are doing now is worrisome at best, frightening at worst.
One problem with following insiders is that they tend to be early–sometimes very early. We engage the services of a group that has managed to address that shortcoming pretty well.
InsiderScore (IS) keeps tabs on insiders by filtering out option-related transactions and by scoring the transactions of certain insiders higher than others. For example, transactions by a CFO are more highly rated than transactions by a board member. IS also knows insiders, in terms of their histories, their employment backgrounds, and is able to bring that knowledge to bear, as well.
IS tracks overall insider activity and develops a score for the broader market, looking at deviation from trend and the like. That indicator has presently shifted into the bearish zone, a place it hasn’t been to since March 2007 and, before that, December 2006–remember, insiders can be early. That’s troubling, but other comparisons are more frightening. For example, they observe that “the last time sellers outnumbered buyers was in September 2008.”
Here are some other observations from their special report published today (“Insider Sentiment Turns Bearish: Sales Widespread, Buyers Show No Conviction.”)
Regarding the firm’s Weekly Score model:
- Market-wide sentiment is the worst since June 19, 2007
- In the S & P 500 sentiment is the worst since December 11, 2007
- In the Basic Materials sector sentiment is the worst since June 24, 2008
- In the Technology sector sentiment is the worst since November 7, 2007
- In Services it’s the worst since June 12, 2007
- In Consumer Goods it’s the worst since June 3, 2007
- In Industrials it’s the worst since May 6, 2008
In addition they cite increased sales by CEOs and CFOs, the two best kinds of insiders. They also now observe widespread selling among insiders, in general, a change from recently, when selling was concentrated in fewer firms, industries, and insiders.
As I mentioned above, insiders tend to be early in both buying and selling. So let’s take a look at their track record, especially with respect to a few of the bullet points above. In each of the charts below, the red line indicates the point of recent maximum bearishness cited above.
Here is the S & P 500, and we can see that insiders, in aggregate, were early, missing the peak by almost eight months. What’s more, they missed a full 10.1% of additional return. Of course, anyone would have preferred being early, even if it meant giving up 10% of upside, if it meant missing a few percent more of downside.
Pictured below is the Materials Sector. Here the insiders were actually late, missing the peak by 39 days and giving up 6.3% from that peak. Judging by the ensuing decline, however, one would have to say that insiders in the materials sector timed it pretty well. Perhaps the more basic nature of the sector–in fact, S & P used to call it the Basic Materials sector–that is, it tends to lend itself to easier supply/demand analysis–makes timing easier. If so, what does that say about current insider sentiment?
The Information Technology sector is pictured below, and here we see the best timing of all. The peak occurred on October 31, and insiders registered maximum bearish sentiment on November 7, missing the top by a weak and giving up just 2.9% of return in the process.
Insiders in the Industrials Sector, pictured below, were about four months early and gave up 9.7% of return.
In the words of King Solomon, let us hear the conclusion of the whole matter. Insiders are ostensibly early, although we can see cases where their timing has been impeccable, so this does raise a red flag. Another red flag was featured in an early post, where we saw momentum declining as the market and stocks rallied. Market technicians refer to that as a divergence, and in a rising market that’s not good. Click here for that post.