Insider's reaction to new market high

How did corporate insiders react last week to the stock market’s new high?

That’s an important question, since insiders presumably know a lot more about their companies’ prospects than do the rest of us. They are a company’s officers, directors and largest shareholders.

The news turns out to be surprisingly good.

This might not be immediately obvious, since the data show that last week they sold $3.20 worth of their companies’ stock for every $1 of stock that they bought, according to the Vickers Weekly Insider Report, a newsletter that keeps track of the insider transaction data reported to the SEC. But, placed in context, this sell-to-buy ratio of 3.20-to-1 is bullish.

A bit of historical perspective helps us to understand why this is so. Perhaps the most important thing to keep in mind is that the average insider almost always sells more of his firm’s stock than he buys. That’s because a big chunk of insiders’ compensation comes in the form of shares. Insiders’ predisposition to sell has become even stronger over the last decade, in fact, because of the increased portion of insiders’ compensation that comes through options.

According to Prof. Nejat Seyhun of the University of Michigan, who has extensively studied insiders’ behavior, the normal ratio of insider selling to insider buying now stands at around 6.5 to 1. The current ratio of 3.2-to-1 therefore represents less selling than average.

The other important piece of historical context to keep in mind is that it is entirely normal for insiders to speed up the pace of their selling as the market rises. This doesn’t mean that they are particularly bearish on their companies’ prospects, but simply reflects their opportunistic behavior to take advantage
of higher prices.

For that reason, according to Vickers, last week we should have “expected ongoing deterioration in the [sell-to-buy] ratio.”

But, in fact, that didn’t happen. The week before last the sell-to-buy ratio was 4.14-to-1, according to Vickers. So in dropping to 3.20-to-1 last week, insiders actually cut back on the pace of their selling as the market reached new highs.
That’s bullish. If insiders as a group felt that the market’s new highs were only temporary, and that a pullback in their companies’ shares was imminent, they presumably would be much heavier sellers right now.

- from Tomorrow's News Today