Posted by Joseph Y. Calhoun, III

Update: Bespoke also offers a skeptical take.

There have been a number of stories in the press in the last week about the pace of insider selling. From the FT:

Executives in charge of the largest US companies are running out of confidence in a recovery, heavily selling the shares they own in their own businesses in preference to buying, according to new data based on filings with the Securities and Exchange Commission.

Sales by so-called company insiders are outstripping purchases of stock so far this month by more than 22 times, suggesting that the insiders are anxious to take advantage of the recent equity market rally and that their faith in its continuation is flimsy.

Data compiled by TrimTabs, the investment research company, based on SEC filings, said insiders of S&P 500-listed companies unloaded $2.6bn in June compared with purchases of just $120m.

The WSJ Market Beat blog has a similar entry:

Insiders are selling their company shares at a pace not seen in two years, providing further evidence that the recent stock-market rally may be coming to an end.

Insiders of S&P 500 companies have now been net sellers for 14 consecutive weeks, according to research firm InsiderScore.com. That marks the longest stretch since June 2007, which was just a few months before credit markets started shutting down and a bear market for U.S. stocks began.

Stock purchases by highly placed executives, such as chief executives and chief financial officers, has been a bullish metric in the past, suggesting a broad market rally was imminent. A wave of buying last November and early March each came right before more than a month’s worth of stock-market rallies.

Two observations. First of all the FT article assigns a motive for the sales that cannot be verified. How does the FT know that insiders are selling because they are running out of confidence in the recovery? Did they ask anyone? If they did, they aren’t quoted in the article. Second, the WSJ blog entry says that insider purchases have been “a bullish metric in the past” but they don’t say anything about the accuracy of insider selling. Why not? Well, consider this story:

The stock market’s two month long upswing is starting to fizzle, leading investors to wonder if maybe this was just a trader’s rally and not the start of a new bull market.

Skeptics have argued that stocks have moved higher simply because short sellers are closing out bearish bets and fund managers are chasing performance in order to boost their moribund year-to-date returns. Optimists point to an improving earnings and economic outlook.

But now there’s another reason to think that this rally might be on its last legs. Corporate insiders, presumably the people who know the most about their companies, dumped shares aggressively last month. So much for a display of confidence by Corporate America.

According to Thomson Financial, insider selling skyrocketed 125 percent last month to $2,6 billion from $1.2 billion in the previous month. Tech insiders were especially busy as the level of selling increased to $861 million from $244 million, a whopping 250 percent rise. And insider buying? That was up just 5 percent, to $193 million from $184 million.

That story is from CNN Money, December 10…….2002 which was right near the bottom of the last bear market. There are lots of reasons insiders might sell, but only one reason to buy. Insiders could be diversifying their portfolios or they could be, like a lot of Americans, selling assets to pay down debts. In fact, we have no idea why insiders are selling right now and to infer one is lazy and possibly inaccurate.