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Insiders sending an ominous market signal

The recent jump in stock prices has one important group of disbelievers.

Corporate insiders have been dumping shares at the highest pace in 4½ years, according to market data firm TrimTabs. The selling averaged $450 million a day in November, the highest since May 2011.

That has come in a month when the benchmark S&P 500 index has gained about 0.9 percent and is coming off its best week of the year, registering a 3.3 percent jump. Insider behavior, though, is often seen as a reliable indicator of underlying market strength, raising concern about the durability of a rally that began in October, tailed off in early November, but has come back strongly of late.

"Talk about crosscurrents," said Jim Paulsen, chief market strategist at Wells Capital Management. "The insider selling is a real negative signal for the market typically."

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One of the primary reasons it hasn't pulled the market down is a push from companies buying back their own shares. Corporate buying, including cash takeovers and new buybacks, hit $96.2 billion in November. Since third-quarter earnings began in October, buybacks have averaged $3.9 billion a day, which TrimTabs said is the second-highest pace since the bull market began in March 2009.

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Buybacks have been an efficient way to push market growth as the Federal Reserve keeps borrowing costs low and retail investors remain reluctant market participants. Zero-interest money market funds continue to hold huge sums, with the current $2.67 trillion total 2.4 percent higher than a year ago, according to Investment Company Institute data.

However, buybacks have faced increasing criticism, particularly from some presidential candidates, as a less-desirable use of capital than investing in plants, equipment and hiring. While buybacks soared capital expenditures have tumbled, falling 5.6 percent in the third quarter.

Essentially, the insiders are selling into strength, taking advantage of market rallies to pull back and cash in during a year when returns have been hard to come by. The S&P 500 is up just 1.65 percent year to date, while the blue chip Dow Jones industrial average is virtually unchanged.

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The market's struggles have neatly coincided with the Fed ending its quantitative easing program, which saw the central bank create $3.7 trillion to buy up various form of debt in an effort to goose financial markets. The third phase of QE ended in October 2014, and with it much of the bad-news-is-good-news theme that had kept the Fed "printing" money.

"I'm at a little bit of a loss as to what you're rooting for in the market, whether it's good news or bad news. It's unclear what the path is for the market to move higher," Paulsen said. "I think we're going to struggle like we have been all year."

Exchange-traded funds also behaved peculiarly during the market's big week, bringing in $1.9 billion total (according to Bank of America Merrill Lynch) but seeing traders flee some of the $2 trillion space's most popular plain-vanilla index funds.

The SPDR S&P 500 saw net outflows of $1.8 billion, the PowerShares QQQ dropped $353.3 million and the SPDR Dow Jones Industrial Average Trust lost $336.8 million, according to ETF.com. Investor sentiment also slipped, with the American Association of Individual Investors weekly survey showing bearishness, or the expectation the market will be lower in six months, rising to its highest level in seven weeks.

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While big ETF outflows often are considered a positive contrarian sign, overall sentiment seems unpersuaded by the market's recent bullish behavior.

Doug Kass, who runs the Seabreeze Partners hedge fund, said in a note Monday that weak market breadth — the difference between advancing and declining stocks — is among his chief concerns for whether November's rally is merely "the calm before the storm."

"The 'ah-ha' moment where investors lose faith in central bankers might be ever closer at hand," Kass said. "Both the technical and fundamentals are conspiring to form a possible toxic market cocktail."