A few tidbits of good economic data and generally better-than-expected profit reports have heated up the market once again on speculation the worst is really over.
Company insiders may be telling us the opposite.
While investors have lifted stocks even higher off the March lows, insiders have been quietly selling lots of shares of their own companies into the strength in the past month.
Ominously, insider sales now stand at levels not seen since late 2007, right before the current bear market began. And history shows that insiders are worth paying attention to, because they're the ones on the front lines.
The good news is that inside selling hasn't yet reached levels that portend a prolonged bear market. Instead, they could be signaling pullbacks that give you a chance to put money into stocks at lower prices.
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But several sectors do appear destined for serious trouble, including consumer-oriented stocks and technology. Specifically, negative trends combined with insider selling suggest to me that First Solar (FSLR, news, msgs), J.M. Smucker (SJM, news, msgs), Moody's (MCO, news, msgs), Pulte Homes (PHM, news, msgs), Riverbed Technology (RVBD, news, msgs), CKE Restaurants (CKR, news, msgs) and Texas Roadhouse (TXRH, news, msgs) are particularly vulnerable.
The inside story
First, here's the big picture:- An insider gauge tracked by Market Profile Theorems, a Seattle research shop, moved into bearish territory July 31 for the first time since November 2007.
- An insider sell-buy ratio tracked by Thomson Reuters has been hovering around bearish levels not seen since November 2006. It recently registered 53, meaning insiders pulled $53 out of the market for every $1 in stock they purchased.
- Another insider sell-buy ratio, tracked by Vickers Stock Research, is now "well within the bearish range," says David Coleman, who analyzes insider activity for Vickers. It hasn't been so high since November 2007.
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Does this mean you should sell all your stocks and hide? Not necessarily. Insiders -- company executives and huge stockholders close to them -- don't always get it right, and market timing is tricky. If you are a long-term investor, it's probably better to wait out near-term turbulence.
The markets could resolve this insider bearishness by moving sideways for a while or with small and temporary corrections, says Michael Painchaud of Market Profile Theorems. We've seen few significant down days, offering better prices, during this summer rally. "Now you may have that opportunity," Painchaud says.
But he says several sectors are now look particularly vulnerable to bigger corrections. They include consumer discretionary stocks, technology, media stocks, software services, semiconductors, industrial products, business services and construction.
| Company | Insider/role | Sale timing | Sale price** | Amount sold | Insider score*** | Stock decline**** |
|---|---|---|---|---|---|---|
Thomas Vann, CEO | Late July | $13.00 | $266,140 | 99 | 26.6% | |
Ronald Robinson, CEO | June-July | $11.00 | $316,315 | 98 | 31.2% | |
James Sabry, officer, director | Late June | $2.99 | $113,928 | 98 | 14.5% | |
Ralph Mandell, chairman | Late June | $22.00 | $322,783 | 97 | 34.9% | |
Jaime Mateus-Tique, president | June-July | $10.50 | $944,041 | 96 | 30.9% | |
Douglas Galen, officer | Late June | $15.06 | $850,370 | 96 | 52.1% | |
David Lidsky, officer | Mid- July | $15.95 | $309,000 | 96 | 19.5% | |
Robert Alexander Young, director | Early June | $26.43 | $792,780 | 95 | 46.5% | |
Robert Hower, director | Mid-June | $8.15 | $2,026,261 | 94 | 34.6% | |
Martin Roper, CEO | Mid-June | $30.00 | $804,758 | 94 | 5.5% | |
Tao Huang, chief operating officer | Mid-June | $42.00 | $1,195,051 | 94 | 19.4% | |
Ronald Packard, CEO | Mid-June | $19.99 | $1,083,315 | 93 | 22.9% | |
Robert Huang, director | Mid-July | $29.75 | $3,075,253 | 93 | 5.6% | |
Helen Greiner, director | Early July | $13.17 | $131,700 | 93 | 8.6% | |
Wendy Cebula, officer | Early June | $40.28 | $856,181 | 93 | 13.5% | |
Glen Riley, officer | Late July | $6.74 | $946,304 | 92 | 16.8% | |
John Dionisio, CEO | Early July | $32.00 | $1,903,882 | 91 | 11.7% | |
Michael Bridge, general counsel | Late July | $21.44 | $970,424 | 89 | 24.5% | |
Anastasios Gianakakos, officer | Early July | $10.16 | $254,000 | 89 | 55.5% | |
Jon Kirchner, CEO | Mid-June | $27.23 | $514,856 | 89 | 10.1% |
*As of July 29; sales ranked as a percentage of market cap, then ranked by insider score; covers insiders such as company officers and directors and excludes external stockholders. **Sold at this price or lower. ***A measure of how good the insider is at market timing on a scale of 1 to 100, with 100 being the best score. ****Average stock decline, six months after this insider's past sales. Source: Thomson Reuters data analyzed and ranked by Michael Brush.
Troubled stocks
Not all insider selling spells bad news for any given company. After all, insiders may simply be selling stocks to raise money for tuition for their kids or some other need.So to find stocks with significant insider selling that look vulnerable, I polled several investors and analysts who have been good at suggesting stocks to avoid in the past. They include Gradient Analytics, a research shop that uses earnings-quality analysis and other tools to spot troubled companies, and Whitney Tilson, a co-portfolio manager of the Tilson Focus Fund (TILFX) and co-author of "More Mortgage Meltdown: 6 Ways to Profit in These Bad Times." I also checked in with John Tabacco Jr. of LocateStock, a service that helps investors find stocks to borrow so they can go short. (Investors go short by borrowing stocks and selling them, hoping to replace them cheaper, later. Stocks in high demand by shorts often fall.)
Continued: 7 companies to watch
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