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Are Insider Sales different this time?
Posted By Barry Ritholtz On September 12, 2003 @ 7:19 am In Finance | Comments Disabled
Mark Hulbert addresses the issue of whether there is an alternative explanation for the unprecedentedly high levels of insider sales  (at least at his point in the rally). Are insider sales this high because they were the first “time in the past three years that insiders have had an opportunity to book any profits personally.”
Hulbert investigated this thesis, to determine if “insider sales don’t reflect any particular pessimism on the part of insiders about their companies.” Using historical databases compiled by Vickers Stock Research Corp., publishers of the Vickers Weekly Insider Report newsletter;
If the alternate explanation has validity, then we should see similar insider behavior coming out of previous bear markets.
Unfortunately, we don’t, at least since 1974, which is when Vickers began compiling the data.
The data series for which Vickers has data extending back that far is called an “8-week sell/buy ratio” for stocks listed on the NYSE and AMEX. This ratio is calculated by dividing the dollar value of all insider sales of listed stocks over the previous 8 weeks to the dollar value of all purchases.
Let’s first look to see how insiders behaved following the 1973-1974 bear market, which – other than the 2000-2003 bear market – was the most severe bear market over the past 30 years.
At the bottom of that bear market, in December 1974, Vickers’ 8-week sell/buy ratio for exchange-listed stocks stood at 0.92 – which means that insiders were buying more of their companies’ stock than they were selling.
It took nearly six years – not until September 1980 – for the 8-week sell/buy ratio to rise above 4.
Currently, that ratio stands at 4.69.
If current insider selling were merely the reflection of insiders striking while the iron is hot, then we should have seen high sell/buy ratios in the beginning months of the bull market that began in December 1974. But we don’t.
Or consider how insiders reacted following the 1987 crash. At the market’s low in December 1987, Vickers’ 8-week sell/buy ratio was at a very low 0.56, suggesting that insiders were buying almost twice as much stock as they were selling.
Incredibly, but for one week in 1993, this 8-week ratio didn’t rise above 4 until 2002, nearly 15 years later.
Hilbert’s conclusion: “Current levels of insider selling are not what typically has been seen at the beginning stages of a bull market.”
Source: Insider selling – take two 
CBS Marketwatch, September 12, 2003
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