Insiders dumping stocks considered leading indicators of market

The overwhelming volume of sell transactions relative to buy transactions by company insiders over the last six months in key leading sectors of the market is the worst Alan Newman, editor of the Crosscurrents newsletter, has ever seen since he began tracking the data.

The strategist looked at insider trading activity amongst the top ten companies that make up the Nasdaq such as Apple [AAPL 307.83 -0.22 (-0.07%) ], Google [GOOG 616.47 -2.13 (-0.34%) ] and Amazon [AMZN 167.51 -2.44 (-1.44%) ].

Then he analyzed the biggest members of the Retail HOLDRs ETF like Gap [GPS 19.34 -0.34 (-1.73%) ], Target [TGT 52.73 -0.41 (-0.77%) ] and Costco [COST 62.98 -0.70 (-1.1%) ], as well as the top insiders in the semiconductor industry at companies such as Altera [ALTR 31.04 0.71 (+2.34%) ], Broadcom [BRCM 41.56 4.34 (+11.66%) ] and Sandisk [SNDK 37.87 0.68 (+1.83%) ].

The largest companies in three of the most important leading sectors of the market have seen their executives classified as insiders sell more than 120 million shares of stock over the last six months. Top executives at these very same companies bought just 38,000 shares over that same time period, making for an eye-popping sell to buy ratio of 3,177 to one.

The grand total for the three sectors are “as awful as we have ever seen since we began doing this exercise years ago,” said Newman, who was ahead on such trends as the dangers of high-frequency trading and ETFs before the ‘Flash Crash’. “Clearly, insiders are seeing great value only in cash. Their actions speak volumes for the veracity for the current rally.”

But the overall market doesn’t seem to care. The S&P 500 is up 16 percent since its 2010 low hit on July 2nd on the back of strong earnings driven by cost-cutting and the hopes for even more quantitative easing from the Federal Reserve.

The insider data “is good reason for considerable caution once the price action fades,” said Simon Baker, CEO of Baker Asset Management. Still “insiders normally buy early and sell early too. Longer term -- 12 months out -- it is more of a red flag.”

Newman isn’t alone in warning about insider selling. The latest report from Vickers Weekly Insider, a publication that makes investments based upon these transactions, shows that total insider sell transactions relative to purchases on the New York Stock Exchange are running at a ratio of more than four to one over the last eight weeks. The normal reading, because of options selling and other factors, is about 2 sales for every buy, according to Vickers.