Corporate insiders such as C-level executives and directors know more about their businesses than you do. That's why the recent spike in insider selling is spooking some more pessimistic market watchers.
Indeed, John Hussman, the well-regarded manager of Hussman Funds, cites an Investors Intelligence report showing that corporate insiders are now selling shares at levels associated with "near panic action."
"Since corporate insiders typically receive stock as part of their compensation, it is normal for insiders to sell about two shares on the open market for every share they purchase outright," Hussman says in a new note to clients. "Recently, however, insider sales have been running at a pace of more than 8-to-1."
The ratio of insider selling to insider buying is even more pronounced on a value basis, hitting its highest level in a year recently, according to data from Thomson Reuters. Taking the total market into account, insiders sold $44.77 worth of stock for every dollar they bought in February. That's the highest insider sell-to-buy ratio since February 2011, when it hit $44.53 to $1.
March, meanwhile, is so far running at $29.48 to $1. Taken together, the current streak of insider selling most closely resembles the levels hit in April and May of last year -- just as the market rolled over on Arab Spring oil-price spikes, the debt crisis in Europe and the earthquake and tsunami in Japan. See the chart of total market insider selling vs. buying over the last five years, courtesy of Thomson Reuters, below:
Hussman says some of the weekly pops in insider selling have notched levels that are associated almost exclusively with intermediate market peaks, the most recent being the run-up to the 2007 market peak, the early 2010 peak and the 2011 peak. Each instance resulted in significant intermediate corrections or worse.
"Of course, it's sometimes the case that insiders are early, and therefore miss part of the tail of a market advance," Hussman says. "So it might be worth ignoring the heavy pace of insider selling for a little while. But you have to ask yourself one question. Do I feel lucky?"