Cashing out: Selling by CEOs, insiders surge

Published Wed, Feb 25 20156:00 AM ESTUpdated Sat, Oct 14 201710:44 AM EDT

As the U.S. stock market marched to a record last week, insider selling by executives surged, a troublesome vote of no confidence on this bull market that's about to enter its sixth year of existence. What do they know that you don't? First, here are the stats. A widely followed reading of insider selling is produced by the "Vickers Weekly Insider" newsletter from Argus Research that has a long-time historical database and time-tested way of tracking buying vs. selling. Insider activity is a difficult market timing tool because selling is usually greater than buying due to the predetermined selling packages anointed to many executives. To account for that, Vickers has tracked a sell-to-buy ratio and has determined that more than 2.5 sells for every single buy transaction means a weakening market is ahead. When there are under two sells for every buy, the stock market has support. In the last week, more than 10 shares were sold by insiders for each one purchased for New York Stock Exchange stocks, a jump from about 6 to 1 a week prior and the highest level since March 2014. Looking at the last eight weeks and selling on all exchanges, the ratio is 4.63 to 1, lower, but still the highest since July of last year. "With major domestic equity indices again at all-time highs, insiders are nothing short of cautious—and more likely blatantly skeptical about a market that for years now has tossed aside an assortment of global economic and geopolitical worries," stated the Vickers report. The ratio of selling to buying "moved dramatically deeper into bearish territory by adding a whopping 439 basis points since last week; it currently stands at an 'Is that a typo?' reading of 10.61." It's not a typo. It's executives who waited for the end of SEC-mandated quiet periods around earnings results and then dumped their shares en masse. The S & P 500 has gone more than 40 months without a 10 percent correction and has quadrupled in value since hitting a low of 666 in March 2009 in the wake of the financial crisis. Source: FactSet In July of last year, the last time insider selling was at these levels, the S & P 500 dropped almost 9 percent before bottoming in October and then rallying back to record levels this week. This time around, executives had good reason to dump their shares as forecasts given during this recent fourth-quarter earnings reporting period were the worst since the financial crisis. More than 200 companies in the S & P 500 lowered guidance, while just 50 raised their earnings forecast for 2015, according to Bespoke Investment Group, the worst ratio of positive to negative since the fourth quarter of 2008. Read More Apple's record rally depends on Obama? The money play: To hedge a drop in stocks, one could buy puts on the S & P 500 or buy futures or call options on the CBOE Volatility Index. There are ETFs and ETNS that track the so-called VIX such as iPath S & P 500 VIX Short Term Futures ETN . There's also an ETF that goes up when the S & P 500 goes down called the ProShares Short S & P 500 . One could also look at companies' showing big selling or buying and bet against or buy those stocks. Barracuda Networks , LinkedIn , Best Buy , Salesforce.com , Facebook and Raytheon have been among the biggest offenders with numerous sell transactions over the last 90 days, according to Vickers. Twitter made the newsletter's Least Liked list because of recent sales this month. (Twitter co-founder Evan Williams had four sale transactions last week.) On the positive side, insider buying has picked up in ChannelAdvisor . Said Vickers on the stock: "The shares fell hard on Jan. 13, and insiders quickly began scooping up the shares. ChannelAdvisor is a $243.92 million market-cap Internet Software & Services company, trading around $9.79 per share with a 52-week price range of $8.21-$49.90." On the flipside, positive insider buying has been seen lately in Investar and General Electric , according to the report.

Evan Williams, co-founder of Medium and Twitter.

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What do they know that you don't?