Insiders have been pulling out of stocks just as small investors are getting in.
Selling by corporate executives has surged recently as the Dow Jones Industrial Average hit 14,000 and retail investors flooded into stocks. The amount of insider selling has usually preceded market selloffs.
"In almost perfect coordination with an equity market that was rushing toward new all-time highs, insider sentiment has weakened sharply — falling to its lowest level since late March 2012," wrote David Coleman of the Vickers Weekly Insider report, one of the longest researchers of executive buying and selling on Wall Street. "Insiders are waving the cautionary flag in an increasingly aggressive manner."
There have been more than nine insider sales for every one buy over the past week among NYSE stocks, according to Vickers. The last time executives sold their company's stock this aggressively was in early 2012, just before the S&P 500 went on to correct by 10 percent to its low for the year.
"Insiders know more than the vast majority of market participants," said Enis Taner, global macro editor for RiskReversal.com. "And they're usually right over a long period of time."
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The Dow Jones Industrial Average jumped above 14,000 last week, but has been stuck just below that level since then. Meanwhile, a record $77.4 billion poured into equity mutual funds and ETFs in January, according to TrimTabs Research.
Looking at a longer time frame paints a bearish picture as well. The eight week sell-buy ratio from Vickers stands at 5-to-1, also the most bearish since early 2012. What's more, the last time this ratio was at these levels was June 2011, just before another correction in the stock market took place.
"Insiders (are) showing a remarkable ability of late to identify both market peaks and troughs," states the Vickers report.
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Coleman cited insider selling in specific companies such as Cintas, Western Union andDavita as a reason to take profits right now.
To be sure, many traders have their doubts about using insider data to try to time the market. They cite the prevalence of option grants and pre-arranged selling plans that may skew the data negative as stocks rise.
Still, for selling to be big enough that firms like Vickers raise a bearish flag, the bulls may want to take heed.
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