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Mark Hulbert
Dec. 15, 2010, 12:01 a.m. EST
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Window dressing creates opportunities
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Digging in to holiday deals
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "â? Corporate insiders evidently believe that the stock market's rally will soon run out of steam.
That's because they recently have been selling the shares of their companies' stock at a pace last seen since early 2007. Need I remind you that this was just a few short months before the Great Recession began?
Insiders, of course, are a company's officers, directors and largest shareholders. They are required by law to almost immediately report to the SEC whenever they have bought or sold shares of their companies' stock.
Vickers Weekly Insider Report is a service that analyzes the insider data, calculating each week a ratio of the number of shares that insiders have sold that week to the number that they have bought. Over the last four decades, according to Vickers, this ratio has averaged between 2 and 2.5 to 1. As a result, the firm considers any reading above 2.5-to-1 to be bearish, since it indicates an above-average pace of selling on the part of insiders.
You better be sitting down before reading what this sell-to-buy ratio was this past week: 7.07-to-1. In other words, corporate insiders on balance are selling more than seven shares for every one that they are buying.
The last time this ratio was this high was the week ending Feb. 14, 2007, almost four years ago.
To be sure, this ratio has been above the bearish threshold of 2.5-to-1 for several weeks now. When, two months ago, I last wrote about corporate insiders, Vickers' sell-to-buy ratio already stood at 5.29-to-1. Read my Oct. 20 column on insiders.
But, even so, it was possible for the bulls to wriggle out from underneath the bearish significance of this otherwise high reading. That's because the average level of the sell-to-buy ratio from past decades may not be a good standard for today's market environment, given the accelerating trend in recent years towards compensating insiders with share grants. As insiders sell in order to cash in on those shares, of course, the sell-to-buy ratio will be artificially inflated.
How inflated? Professor Nejat Seyhun, a finance professor at the University of Michigan who is an expert on the behavior of corporate insiders, estimates that the "normal"? level for the sell-to-buy ratio is now closer to 6 or 6.5-to-1.
Unfortunately, the latest sell-to-buy ratio now exceeds even this higher threshold.
Does this mean the market will immediately tank? Of course not.
In fact, Jonathan Moreland, editor of the Insider Insights advisory service, advises clients to not prematurely give up on the rally, despite the worrisome recent trend of insider behavior: "Experience has taught us that it is usually best to stay the course until the indices themselves begin to show a change in trend. There is still good money to be made staying long in the late stages of a rally."?
Therefore, Moreland concludes, even as he remains on "high alert for a trend change,"? for the moment he will continue to be fully invested.
David Coleman, editor of the Vickers Weekly Insider Report, is not willing to give the rally the benefit of the doubt that Moreland is willing to do. His two model portfolios currently have an average of about 60% allocated to cash, and in addition, one is hedged with a put option on the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,240, -1.45, -0.12%)
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
It's the holiday home stretch, and the deals keep on coming, but at what cost?
20 min ago12:18 p.m. Dec. 15, 2010
"Mark Hulbert: Insiders are headed for the exits http://on.mktw.net/exT3fq" 3:27 a.m. EST, Dec. 15, 2010 from MktwHulbert
"Mark Hulbert: Window dressing creates opportunities http://on.mktw.net/ehhSUc" 11:21 p.m. EST, Dec. 13, 2010 from MktwHulbert
"Mark Hulbert: What "Santa Claus Rally"? really means http://on.mktw.net/fSbSDZ" 12:16 a.m. EST, Dec. 7, 2010 from MktwHulbert
"Mark Hulbert: Sam Eisenstadt forecasts a bullish 2011 http://on.mktw.net/foQisj" 11:39 p.m. EST, Dec. 2, 2010 from MktwHulbert
"Mark Hulbert: Exploiting the tax loss selling effect http://on.mktw.net/fJ90RM" 12:10 p.m. EST, Dec. 1, 2010 from MktwHulbert
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