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To whom have all these corporate insiders been selling so eagerly in recent months, anyway?
According to the data provided weekly to Barron's by Thomson Reuters and published in Market Lab, the latest dollar-based ratio of insider share sales to outright purchases was 40, and the week before that was 35.
As a very rough guide, a number above 20 is considered a negative symbol about supply and demand for equities by informed actors, and the ratio has been at or above 20 in six of the past 10 weeks. The last time there was a grouping of as many weeks above 20 and the four-week average was as high as the current 28 was late April into early May of last year, a better sell point than buy moment, in retrospect.
Let's hasten to say, it never specifically matters who is buying those shares offered by insiders, or by anyone. With that scary ratio of 40, it still came to only $293 million sold in the week, versus $7.3 million bought, trivial amounts to ingest and digest, given the size of the market. And, for sure, insider selling is but one imperfect component in an array of imprecise gauges of sentiment and tactical market conditions, none of which tend to be flawless trading guides.
Like other people, insiders have tuition and tax bills and divorces to finance, and their stock is accumulated and liquidated on the up and up—even if they rarely turn their shares into cash in large numbers when they perceive their stock is undervalued. Which is why, on a company-specific basis, a shareholder of Tiffany (ticker: TIF) might at least wonder or inquire why 13 insiders there shed $42 million in stock in a cluster following its latest positive earnings report.
This all may be a mere straw in a wind about to abate. Still, it's worth exploring what players have been the leading net buyers of stocks in the impressive first-quarter run.
The broad public, to the extent it's measurable, hasn't been chasing the rising tape. Domestic stock mutual funds have continued to bleed money most weeks. A steadier inflow has gone toward "hybrid" funds, which can own bonds and dividend-paying equities, basically yield-oriented vehicles for the income-starved. This is a half-step that surely moves some cash toward stock managers, but hardly means retail investors are intoxicated by the market's strength.
In contrast, professional traders and other habitual speculators have now bought into the rally, as the 77% bullish reading by Consensus Index and 68% bulls in the Market Vane weekly survey suggests. A Charles Schwab poll of its most active traders produced similar results.
Hedge funds and similar investing pools entered the year cautious after what seemed a pretty strong market advance from October. They have steadily increased their exposure in recent months. But separate data from www.CarpenterAnalytix.com and Bank of America Merrill Lynch show exposures of futures funds and long-short equity funds rising but not far above historical average levels.
Another constituency has been staunchly buying stock for years now, whether insiders were heavy sellers or not: big companies themselves. Share buybacks slowed a bit in the fourth quarter, but announced buybacks last year totaled $409 billion, according to Standard & Poor's, up 37% from 2010's level, making almost trivial the study of the trickles flowing out of, and occasionally into, stock funds. S&P says first-quarter executed repurchases could reach $100 billion.
After all, as share prices rise the way they have (making insiders more tempted to sell), it puts more employee stock options "in the money" for accounting purposes, expanding companies' diluted share count. This means that companies are inclined to buy in more of their shares to bolster their per-share earnings. See how this game works?
All of this makes the supply/demand picture for stocks pretty ambiguous. As April dawns, some things look and feel a lot like the last two Aprils, with trend-respecting professional traders bullish and market volatility quite low, but few signs of speculative excess or valuation silliness elsewhere. Those placid first-quarter rallies preceding brief but nasty downturns were not their own undoing; they merely left investors susceptible to insufficiently anticipated shocks.
This time, with the market so far resisting most plausible excuses to pull back much and showing solid leadership by large growth stocks and domestic-economy bellwethers, is it sending a believable message about its staying power and the U.S. growth path? For the bulls it better be, based on the stretched look of a number of consumer-related stock charts.
A flattish earnings season to come, a possible European- debt flare-up, inscrutable China prospects, U.S. economic data that might have been flattered by very warm weather – these are the "known" risks. If they're all the market will have to absorb, then maybe the next retreat won't be another panicked threat of a return to crisis times, but rather a simple "orderly pullback" or plateau phase–a rare thing indeed the past few years.
Email: michael.santoli@barrons.com
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