barrons_online

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Alan Abelson points to an interesting chart from Trevor Greetham, Merrill Lynch’s chief of global asset allocation. It shows the historical correlation going back 15 years or so between insider sells and the markets subsequent performance:

click for larger graphic
Bupdown_wallst_12172004_1
graphic courtesy of Barron’s


Excerpt:

". . . His calls have been pretty much on the money for at least three years running, so if he’s uneasy, it’s not a bad time to take some money off the table. He has some interesting company: directors of public companies have turned pronouncedly bearish. Take a gander at that chart nearby, what it depicts is the ratio of directors buying their companies’ stock to directors selling their companies’ stock going back to 1980. It also tracks the S&P 500 index over that stretch.

As you can see, at last count, more than six directors were selling for every one that was buying, a ratio, Trevor informs us, exceeded only once before in 30 years. This is not, he comments, a contrarian indicator. Directors, in fact, have had a pretty good record in timing the highs and lows in the market."

I find the chart intriguing, and its yet another piece of the puzzle supporting an eventual denouement (though Greetham’s top is sooner versus my later).

But a few caveats are definitely in order:

  1. Since the comparison is between insider sells to the S&P500, the chart should really show SPX directors — or use a Wilshire 5000 graph. Remember, we are trying to create a correlation, and the variables should match as well as possible.
  2. Most of the chart covers the 1982- 2000 Bullmarket. It may not correlate well to a period including a significant Bear Market (2000-2003, or 2000 – ? if you care to be precise);
  3. I’d also like to see  if there has been a significant change in the predictive abilities of insiders from the 1980s til now. Today has more outside directors, different treatment of options,  and a variety f other variables that could impact this study.

All that said, its an issue worth watching.


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Source:
Thin Air
Alan Abelson
Up And Down Wall Street                                          
Barron’s Monday, December 20, 2004 
http://online.barrons.com/article/SB110332968171803792.html

Category: Markets

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2 Responses to “Bad Company?”

  1. wcw says:

    See also Hulbert’s NYT article a couple weeks back reporting how insider sales numbers change when taking options as well as open-market transactions into account. While he doesn’t break out directors, it’s certainly possible that their behavior has been infected by the same cheap-call sniffles with which all the top executives have down these last few years.

  2. Looking Ahead

    To me that suggests that we may be facing a recession or significantly slower growth in the relatively near future.