Market Mismatch: Insiders Sell as Stocks Soar
Despite record-breaking stock prices, company executives are selling their shares at an alarming rate. This mismatch between market performance and insider sentiment has raised concerns among investors.
A Rare Disconnect
A gauge of insider sentiment reveals that only 98 companies have seen insider purchases this month, compared to 447 with insider sales. This buy-sell ratio of 0.22 is on track to be the lowest on record since 1988. Typically, such a high level of selling would indicate a lack of confidence in the company’s stock. However, there are many factors that can contribute to insider sales, including market performance, share value, and personal reasons.
Seasonal Patterns and Risk Control
Mark Hackett, chief market strategist at Nationwide, attributes the surge in selling to the natural seasonality of insider sales, particularly in large technology companies that have seen significant gains in recent years. “Following a tremendous two-year run in equities, it’s natural to see a surge in selling,” Hackett said. “It’s important to watch, as it could indicate fading confidence in the risk/reward profile of the group of stocks with elevated valuations.”
Buybacks Paint a Different Picture
Corporate buybacks tell a different story. Data from Birinyi Associates shows that buybacks for January are at their strongest level since at least 1999. Major US companies, including General Electric Co., Citigroup Inc., and Netflix Inc., have announced plans to buy back stock this month. According to Jeff Rubin, Birinyi’s head of research, US companies have announced over $48 billion in buybacks through January 22, putting it on pace for the strongest January since 1999.
Insider Activity vs. Company Activity
Matt Maley, chief market strategist at Miller Tabak + Co., notes that there is often a big divergence between insider activity and company activity, even though the same people are making the decisions on both. While company buybacks can be bearish, insider selling is rarely a good sign.
A Delicate Balance
The stock market is currently at a strange juncture, with equity indexes powering to new highs despite looming risks from tariff wars, massive deportation efforts, and uncertain geopolitics. Valuations, especially those of technology companies, are riding high, making many worry about the sustainability of the current rally. For now, investors are choosing to focus on the positives, but the high level of company insiders selling shares is a reason for concern.
A Track Record of Providing Early Reads
The insider buy-sell ratio has a track record of providing early reads on market direction. In August 2015 and late 2018, the ratio jumped, preceding market bottoms. In March 2020, corporate insiders’ purchases correctly signaled the bottom of a bear-market rout. Steve Sosnick, chief strategist at Interactive Brokers, notes that while buybacks may be a secular trend, insider selling strikes him as the more bearish data point.
Leave a Reply