As Insiders Head For the Exits, Do They Know Something "We" Don't Know?

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Whenever the markets begin to look toppy like they do now, I turn to short-term indicators to help me figure out "what's next" for the markets. It complements the fundamental analysis I rely on for the big picture.

Some people – lots of people, in fact – will tell you that this is a wasted exercise. Predicting the markets, they say, can't be done. I disagree if for no other reason that if that were true, guys like Jim Rogers, Warren Buffett, Steve Jobs, Richard Branson and Carlos Slim wouldn't be the legends they are today.

As I see it, learning to "read" the markets and anticipate its twists and turns is absolutely possible.

But let me qualify my statement. My goal is not necessarily to be "right."

Any savvy trader will tell you the objective is to get enough of a read – right or wrong -so that you can use the appropriate tactics needed to be profitable.

For example, the markets have one heckuva run and flirted with new highs in recent trading. To the casual investor, it appears that things are good because the economy is gradually recovering.

Yet, there have been nine insider sales for every single buyer among NYSE stocks in the past week, according to the Vickers Weekly Insider Report as reported by CNBC.

Clearly something doesn't match up, especially when you consider that the last time insiders sold this aggressively was in early 2012, right before the S&P 500 took a 10% header.

As my colleague, Bill Patalon, noted recently in his Private Briefing column, there are all kinds of legitimate reasons insiders sell their shares. They range from simply taking profits to portfolio reallocations, estate planning, raising cash to pay the ginormous taxes that come with success, even financing dream homes. So there could be something else at work here. But I don't think so.

What concerns me is that insiders, particularly when you're talking about senior management types, typically know a lot more than the average investor. Further, they tend to have a consistent view of very specific longer term market conditions and, more importantly, its earnings potential.

They are, as Enis Taner of RiskReversal.com noted to CNBC, "usually right over a long period of time."

What Insiders Sales Say About the Market

My take is that the insiders are spot on. I also believe that the fact that they've chosen to sell aggressively right now suggests a looming correction is in the works. Here's why:

  1. The markets have run higher against a backdrop of seriously flawed fundamental data, incessant Federal meddling, political disarray and a complete lack of supervision on Wall Street.
  2. Insiders are taking profits at a time when the rate of earnings growth is declining and forward-looking forecasts have been dropped to almost laughable levels. They – the insiders – are well aware of not only market uncertainty, but corporate insecurity in the months ahead.
  3. Markets tend to take a while to digest their gains after each run higher. Since 2009, for instance, the markets have taken nearly 12 months to consolidate after every 1,000 point run before moving higher. This means that there will plenty of dips, twists and turns that will test investor resolve. Because the markets have an upside bias over time, most corrections, reversals and complete breakdowns generally turn out to be tremendous buying opportunities – a fact that will be lost on most investors who panic if a rollover gets started in earnest.
  4. dow chart

    Figure 1: Fitz-Gerald Research Publications, Yahoofinance.com

  5. We have not seen the kind of "blow-off" action yet that has accompanied major market reversal points in the past, most notably those in 2000, 2003, 2007, and 2009. So I want to be on guard against the possibility if trading becomes frothy.

With that in mind, here are my key takeaways:

  • Market history shows that insiders tend to sell holdings shortly before market tops or short-term corrections. Generally speaking, the more aggressive the sales, the more serious the following correction.
  • A 9-to-1 selling ratio is significant because it resembles extremes associated with other major market turning points in recent history.
  • While not a fait accompli, investors should tread lightly under the circumstances. They should also take appropriate action to ensure their portfolios are not ravaged if a substantial correction does, in fact, materialize. Examples include tightening up trailing stops, purchasing put options, going "long" volatility or buying specialized inverse funds – all of which can take the sting out of a sudden reversal while also preserving upside and income.

My fear is that we've already reached the point where there is so much money sloshing around that the next "big thing" from Team Fed may actually be the straw that breaks the camel's back. But that's another story for another time.

Thank goodness protection is cheap at the moment. Assuming, of course, insiders know something "we" don't.

>>For more wisdom from Keith, check out How to Invest in 2013 Without Losing Your Shirt.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. 48ozhalfgallons | February 8, 2013

    Mr. Fitz-Gerald, You make complete sense, but this is an irrational market pumped by the Joker. It seems that it has to correct soon, but when and how far? I'm waiting for Dow to fall to 10600. Then there are those who say that a good January means the market will finish up for the year. January was up 6%. So, a 20% correction happens around April-June followed by a 20% rebound, leaving the market up 3 or 4% for the year. The next issue is the shape and rate of the rebound. The V kind are the killers. No time for breath. The market is for athletes.

  2. fallingman | February 8, 2013

    You make complete sense…no buts.

    "My goal is not necessarily to be 'right.'

    Any savvy trader will tell you the objective is to get enough of a read – right or wrong -so that you can use the appropriate tactics needed to be profitable."

    YES! Or said another way…so you can protect your backside, because you're likely to be wrong about as often as you're right when making straight directional bets.

  3. DavidM | February 8, 2013

    Keith,
    Your report only focuses on one week. That data can be an aberration. What is the trend?

    I can understand insiders selling in November/December because of the increases tax burden on trades, which would effect data, but look at what has been happening since Jan. 1 and share that data with us.

    Though the market has had a huge run up over the last two months and may need some cooling, the data from Vickers was shared via CNBC. It might be good to be a contrarian.

  4. David Orme | February 8, 2013

    You didn't mention it, but your chart counts pretty nicely in Elliot Waves–putting us at or near the end of an impulse wave of count 5, meaning that the next wave is likely to be a downward (correction) wave 1 of 3. Looks to me like a good time to take profits…

    Dave

  5. Alan Scott | February 8, 2013

    2/8/13 8:45am Pac time. Keith, if you haven't happened to note this, the Dow topped back in October, 2007, and here we are, 5 years later at a DOUBLE TOP! A monthly double top/bottom can mean something but a 5 year double top here has a lot of smart traders being aware of that (just as the average guy or gal out here does not chart or look at a Big Picture ahead of smaller, inside picture, SO, at least be aware here –if we break UP, we have another leg higher, if we break down, that surely tells us that we may have a pretty solid downmove from that point. FURTHER, if we had a President with any real experience in our private sector, he would know if successful out here, that it makes a hell of a lot more sense to see out here 70,000 workers building Boeing airplanes to sell around the world, than it does to hire, instead, those same 70,000 workers into say the federal government! An intelligent leader would know to lower taxes on the private sector, never, ever raise them –because real wealth becomes standard of living where government workers have to depend 100% on their fellow workers in the private sector to create enough real wealth that those workers can pay TAXES to government to run that government AND the workers in the private sector have to factor-in the cost of government into total costs of producing real wealth and then set a Price that includes all those costs, including GOVERNMENT, before they can set PRICES that have to include profit AND which also has to be competitive in the martketplace because the SALE insures that that producer and product can repeat the process again and again, whereas, if the competitor gets the sale, that producer that lost, is on the way to bankruptcy AND a lower sttandard of living.
    { It has to follow that the lower the cost of government, the lower the PRICE of real wealth for sale, can also then be more competitive and raise it's standard of living. Anyone who thinks taxes are more important than selling real wealth is a FOOL!

  6. Alan Scott | February 8, 2013

    The one thing our Foujnding Fathers missed (in correctly making us a Republic, not a democracy) was to project the percentage of working Americans who would gradually move from being enrepreneurs to wanting someone else to do his or her or it's (companies) work for him or her or it! For example, if you have an 8 man rowing crew and you are at the Starting Line with 7 other crews, if, as the race gets under way, boat #7 has alll 8 guys rowing hard, but boat #3 has 3 of it's rowers decide to watch the race and not row,k guess which crew is going to win that race! There should have been TWO governments and NO political parties –that way both governments would have to act toward winning over the other one and get off it's ass to get that done –we humans most of us follow the Law of Inertia! It is easier to rest and let someone else do it, than it is to get off our asses and workl harder and faster and more efficiently, but in doing the former (sit) the whole group's standard of living follow accordingly. If our "leaders" were more intelligent, they know that we became the United States of America in order to get rid of a government that knew only to demand more and more of the American workers wages, taken by force, by ignorance, selfiishness and mental laziness!

  7. H. Craig Bradley | February 8, 2013

    GOOD OLD INVESTOR "COMMON SENSE"

    Sure, its merely "common sense" that the owner or manager of a company knows more about his business than you (public) probably do. Its just not everyone focuses on this fact at times. Its one piece of information which alone does nobody much good, if you are inclined to attempt to time the market on it. I learned a long time ago that is foolish and besides, as you have already said Keith, "85% of investors can not successfully time markets".

    I agree, when the market currently appears "overbought" then you might hold-off buying additional shares for awhile. Its a precaution in which you are in effect reflecting the probability of a near-term market correction of some as yet unknown magnititude. Anotherwords, its a guess.

    So, what's a noticable difference between Mad Money's host Jim Cramer (former hedge fund manager) and current professional stock traders? Jim Cramer has the bells and whistles. Refer to Vanguard founder John Bogle's recent interview on "Breakout" ( "Investors Ignoring the Real Risks to the Market ") for a more traditional point-of-view on what "Works" for most individual investors and what "the rules" really still are.

  8. Rusty Brown | February 8, 2013

    Actually, Warren Buffett is famous for saying that he cannot predict the market and doesn't believe that anyone else can either. His approach is to buy into undervalued situations and wait, as I understand it.

  9. H. Craig Bradley | February 8, 2013

    Referenced segment of "Breakout" interviewing famous investor John Bogle is found at:
    http://finance.yahoo.com/blogs/breakout/investors-ignoring-real-risks-market-john-bogle-140549567.html

  10. rick baldwin | February 8, 2013

    If insiders are selling,I am too.

  11. James | February 9, 2013

    Excellent article, Keith!

    Your chart on the Dow Jones Industrial Average by year for the last four years (2009 to 2012) gives us a good working guide as to how the stock market is going to behave in 2013. I am going to keep this chart as reference and compare the 2013 DJI behavior to whatever year is applicable for the rest of this year. This chart is a working tool for investors. We can make more intelligent decisions based on past DJI behavior. History tends to repeat itself. This one chart makes it worth the annual subscription to Money Report. I hope your readers see the light and see its significance. And I hope during the course of this year you will update the chart in future articles. Thank you very much for providing the chart.

    As far as insider selling, I think it's more insiders taking profits when the market is up. Another investment writer said this is going to be a sideways market going forward for the next several years. The market is going up and down. In this kind of market, you sell when the market is up and buy when it's down, on the dips.

    IMHO, we are in a secular bull market. I am not worried about the wild gyrations. The ones who leave the market are the ones who are going to be left behind.

    The most important statistic to watch is the Gross Disposable Product (GDP) number and it is going up slowly which is good, despite the short breather in the fourth quarter. As long as it continues to go up the market (DJI) will go up along with it. For all the flaws existing in our financial and political system, our U.S. economy shows strong underlying strength.

    Don't you agree?

  12. Chris | February 10, 2013

    My feeling is that anyone selling in the last five years has missed out on the next wave up. Remember, don't fight the fed! When the fed is injecting 85 billion a month into the banks and they turn around and buy stocks with it rather than loan it out, I want to be on the long side of that move. Also, we're seeing money finally coming out of bonds and moving into stocks. Once again I don't want to be opposing that wave either. When watching insider trading you have to realize that those folks get a year-end bonus of stock or options and they cash out some of that in January. You may be seeing that kind of activity right now.

  13. Keith Fitz-Gerald | February 11, 2013

    You guys all raise some very interesting and valid points – and I love that. Thank you for taking the time and the mental bandwidth to respond!

    Insider selling is always a loaded term. People hear it and immediately think in all or nothing terms when, in fact, the markets are far more subtle. I've never, for example, seen an insider sell everything all at once. On the other hand, I have seen plenty of individual investors do just that and most of the time with disastrous results.

    I'll be watching the insider ratio carefully over the next few weeks and will report on what I find. I'll also be exploring Elliott Wave connection more deeply.

    With best regards,

    Keith

  14. H. Craig Bradley | February 12, 2013

    JOHN BOGLE ON ETF'S

    "As for leveraged and inverse ETFs, Vanguard founder John Bogle says this is where the "fruitcakes, nut cases and lunatic fringe" can be found. "There's just no possibility or any realistic way that you're going to win that bet," he says about leveraged ETFs."

  15. stevo | May 3, 2013

    Let's laugh at genius Keith this time, another short term foollishness confirm long term wisdom

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