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Insider Selling Spikes Post Earnings Season

After better-than-expected third quarter earnings reports pushed the S&P 500 to a new high for 2010, insider selling spiked to levels not seen since the previous high for the year reached in April. Executives fleeing their own stock prices could signal their lack of confidence in future growth prospects.

“Last week, the volume of Form 4 filings spiked higher as the end of earnings season neared — freeing many insiders from trading restrictions,” said David Coleman, editor of the Vickers Weekly Insider Report. “This ongoing pop in our Sell/Buy readings, coupled with a jump in the volume of Form 4 filings to well above the five-year average, seems to be a clear bearish signal.”

There were more than six sales for every one buy in the last week, according to the report. The trailing eight-week sell-buy ratio — the preferred metric used by Vickers for timing the market — is now at almost five sell transactions for every buy, the most since April. The S&P 500 hit a new high for the year last week.

Netflix , Salesforce.com , Google , Oracle , Panera Bread and Imax are among the stocks most actively sold by insiders over the last 90 days, according to Vickers. This week, Microsoft said in a filing that CEO Steve Ballmer sold $1.3 billion worth of the shares, his first stock sale in seven years.

With about 90 percent of the S&P 500 having reported, one would think the spectacular results would spark an increase in insider buying, not selling. Earnings for companies in the S&P 500 jumped 31 percent in the third quarter, according to Thomson Reuters, up big from the 24 percent increase analysts estimated when the quarter ended.

A look at the top line may give a clue as to why executives are cashing out. Revenue growth increased by just 8 percent last quarter, just one percentage point above the 7 percent growth expected by analysts at the end of the quarter. Companies have cut costs to the bone, so if sales growth is slowing the only way to beat fourth quarter earnings would be from good old-fashioned end demand.

Still, many traders questioned whether insider selling is a good timing indicator for the market. After seeing this data, they argued that many of the insiders are just like everyone else and have been underwater since the Lehman collapse. They're now using the lifting of selling restrictions around earnings to take some profits.

So if they’re doing it, why shouldn’t you?

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