Tags: Hulbert | insider | selling | stocks

Hulbert: Increase in Insider Selling May Be Warning Sign for Stocks

By    |   Friday, 22 November 2013 07:49 AM EST

A dramatic rise in corporate insider selling could signal the end of the bull market for stocks.

With their special knowledge of their businesses, those corporate insiders are probably better able to forecast their companies' performance than others, Mark Hulbert, editor of the Hulbert Financial Digest, writes in an article for Barron's.

Just 17 percent of transactions of corporate officers and directors have been purchases, according to research by University of Michigan finance professor Nejat Seyhun. That's the lowest since 1990 when he started collecting the data. The figure compares with 27 percent last year, 35 percent two years ago and an average of 38 percent since 1990.

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Seyhun does not count transactions of large shareholders, even though Securities and Exchange Commission regulations define them as insiders. Unlike company officers and directors, those shareholders lack access to real insider information and don't seem to be able to pick stocks better than the rest of us can.

The regulatory definition can skew reports of insider selling, Seyhun explains. Because large shareholders typically own much more than top executives or directors do, their selling can create the appearance of insider selling even if people really in the know are buying.

David Miller, senior portfolio manager of Catalyst Insider Buying Fund, which picks stocks based on insider trades, tells Hulbert, "There definitely is heavy insider selling overall across the market."

While selling varies widely by industry, telecom, industrial goods and technology are experiencing large amounts of insider selling, Miller states, naming Tesla Motors and Netflix as top examples.

Health care, consumer discretionary, materials and energy are seeing net insider purchases, he adds, citing Freeport-McMoRan Copper & Gold as well as Kinder Morgan.

Despite the spike in insider selling, the bull market could continue for some time, Hulbert notes. Insiders selling stocks may be premature. Legal liability is a factor: They don't want to look like they're selling right before their stocks plunge.

A new report from S&P Capital IQ indicates that following trades of corporate insiders can lead to market-beating returns.

"Opportunistic buy, intensive buy and directional change from sell to buy acted as strong indicators of future stock performance, generating one-week abnormal returns of 0.48 percent, 2.47 percent and 0.55 percent, respectively," the report states. "Mimicking the net purchase actions of CEOs yielded an excess return of 1.27 percent over the one week after the trading."

"Corporate insiders are a unique class of traders as they possess the most intimate information about a firm," says Dave Pope, managing director of S&P Capital IQ and editor of the report.

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Related Stories:

Mark Cuban Not Guilty: Jury Returns Verdict in Insider Trading Trial

CNNMoney: Downturn Coming as Corporate Insiders Are Selling

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A dramatic rise in corporate insider selling could signal the end of the bull market for stocks.
Friday, 22 November 2013 07:49 AM
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