Saturday, April 25, 2009

Insiders are selling the rally (not surprisingly)

From Insider Selling Jumps to Highest Level Since 2007

"While the Standard & Poor's 500 Index climbed 28 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.

"Insiders from New York Stock Exchange-listed companies sold $8.32 worth of stock for every dollar bought in the first three weeks of April, according to Washington Service, which analyzes stock transactions of corporate insiders for more than 500 institutional clients.

"That’s the fastest rate of selling since October 2007, when U.S. stocks peaked and the 17-month bear market that wiped out more than half the market value of U.S. companies began..." [emphasis by me]

This is supposed to cast doubt over the sustainability of the on-going stock market rally since the March bottom (when S&P500 index stopped at 666). See, insiders are selling. Don't become a bagholder, or last one without the chair.

Still, there are couple of observations you could make:

  1. Insiders are not necessarily the best traders or investors, even though they may know their respective companies well.
  2. This is about the first "rally" sustained long enough to take long positions or sell long positions in an orderly way (as opposed to panic sale), ever since the cascading market crash of October/November 2008. Can't blame anyone for selling while they have the chance.
  3. They may have margin calls on their accounts and need to sell. Before you roll your eyes and laugh, remember the CEO of Chesapeake Energy. He had to do exactly that. And Goldman Sachs is reportedly assisting the partners who have margin calls on their accounts.

The market had a first down week since the March bottom (except Nasdaq, which extended the winning streak to 7 weeks). After the sharp V recovery, the pace of the market advance has slowed in the past 3 weeks. Bullish or bearish, caution is indeed warranted.


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