Notable insiders like Elon Musk and Adam Aron are selling. Should you follow them?

Published Fri, Nov 12 202112:15 PM EST

Corporate insiders involved in some of the most notable bull market stories this year, such as Tesla 's Elon Musk and AMC 's Adam Aron, have started to cash in. Will the retail investors that followed them be left holding the bag? And what does this mean for the overall stock market? This week, two high-profile executives' selling activities caught investors' eyes. AMC CEO Aron sold 625,000 shares of the company Tuesday , half of what he ultimately plans to dump. Meanwhile, Musk dumped $687 million more Tesla shares on Friday after selling $5 billion earlier this week, progressing on his vow to sell 10% of his holdings. Tesla shares are up 150% over the last 12 months, AMC are up more than 1,200%. What should be worrying to investors is that these high-profile sellers are not alone. Robinhood chief operating officer Gretchen Howard sold more than 20,000 of shares of the trading app on Friday. Fastly, McKesson, Shutterstock, Under Armour, Domino's Pizza have all seen notable insider selling activities in the past seven days, according to InsiderScore, which tracks the data. In fact, overall insider selling activity has picked up to a point lately that has been a warning signal for the market in the past. The so-called open insider buy/sell ratio dropped to 24.3% this week, meaning insider sellers are outpacing insider buyers by a ratio of nearly 4-to-1, according to Guy Ortmann, director of research at R.F. Lafferty. The indicator just flashed a bearish signal on the broader market as of Wednesday, Ortmann said. Note that there is typically always more insider selling than buying because of stock options grants, etc. so tracking the ratio over time is important. And while many of these sales are part of scheduled selling plans with estate planning, taxes and other individuals justifications given, taken in aggregate this activity can often be a sign of tops in the individual stocks or market, analysts say. "Insider/Buy Sell Ratio saw an uptick in selling activity and turned bearish," Ortmann said. "The insiders typically are on the right side of the trade." The escalation in insider selling action came as the stock market climbed a wall of worry this year and shrugged off concerns about inflation and slowing growth. Up nearly 24% in 2021, the S & P 500 has eclipsed almost every major strategist's year-end target on Wall Street. The S & P 500 was headed for its first down week in six amid the high profile sales, with Tesla dragging on the index with a 15% loss this week. To be sure, it may be too early to say insider selling has reached a point that marks the top. That could be triggered if more executives continue the trend in coming months. Looking at insider transactions over a rolling six-month period, the number of selling transactions among the S & P 500 stocks has actually been trailing off a bit lately, according to Jason Goepfert, chief research officer at Sundial Capital Research. The rolling six-month period tends to even out short-term spikes and is less influenced by infrequent large transactions, Goepfert told CNBC, and that's why he uses it. Still, there are a number of stocks that saw an acceleration of insider selling in the past six months that investors should avoid, according to Wolfe Research. The firm screened names for "short stock ideas" with heightened insider selling activity while these stocks have recently traded near 52-week highs. Large-cap stocks that were recently added to this list include: Ford , Petco Health , Signet Jewelers , Bunge , and Steel Dynamics . — CNBC's Michael Bloom contributed reporting.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Wednesday, April 17, 2013. U.S. stocks sank, erasing yesterday's rally, amid losses in industrial metals and disappointing results from Bank of America Corp.

Scott Eells | Bloomberg | Getty Images

Corporate insiders involved in some of the most notable bull market stories this year, such as Tesla's Elon Musk and AMC's Adam Aron, have started to cash in.

Will the retail investors that followed them be left holding the bag? And what does this mean for the overall stock market?