Monday, June 22, 2009

Risk Asset Rebound... Then Why are Insiders Selling

Business Day reports:

Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies' prospects.
This follows a 40% jump in the stock market over the past ~3 months (apparently the fastest such rally in 71 years) . So why sell? To understand that lets put that rebound (and all other asset class returns since the last "selling period") in perspective.

The chart below shows the cumulative return of a number of assets class indices since that June 2007 date. While the overall trend was apparent pre-September Lehman collapse (i.e. the more leveraged the asset, the higher the sell-off), the massive divergence between risk asset returns becomes more apparent after that date. It is interesting how much those assets higher in the capital structure hurt (i.e. debt - both investment grade and high yield) have rebounded after forced selling by investors at that time (the returns now actually make sense).

So equities still have a way to go before the are fully recovered and the recent rebound reflects the appearance of a stronger economy you say? Well, take a look at the chart below showing the returns of those same asset classes in the September - February period (i.e. the world is ending period) and the time since. It makes the record rally appear to be nothing more than a partial rebound.

Thus, the question remains... is the rebound really justified for ALL risk assets? If you are to believe insiders, the answer is a resounding no.

Source: Barclays


  1. Jake,

    "Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007 ... executives presumably have the best information about their companies' prospects."

    Having some perspective or track record over the long term would be quite useful to determine the credibility or actionability of an anecdote or opinion. That is, what is the objective reason as to why anyone should pay attention to what something or someone is saying? People need more than a superficially logical, often implied, but frequently never tested, reason to jump to a conclusion.

    In this case, what is the track record of this class of people over the last few decades? If they have the best information, have they demonstrated reliability to benefit investors? Without some perspective the current incident could simply be luck about being able to sell for some nice gains after a very strong short term rally.

    P.S. Welcome back!

  2. there's actually quite a bit of data on this... here is one:

    Professor Seyhun found that when insiders sold during a decline, the stocks they sold lagged behind the overall market by an average of 5 percent over the next 12 months. To illustrate, he points to the beginning of the 2000-03 bear market. Over the six months after the Internet bubble burst in March 2000, Vickers's eight-week sell-buy ratio more than doubled, from 0.78 to 1.94. From September of that year to the following March, the Wilshire 5,000 fell by 21 percent.

    IN contrast, Professor Seyhun found no discernible pattern in the subsequent performance of stocks sold by insiders while the market was rallying.

    As a result, he concludes, the current high level of insider selling provides no signal for the market's direction. He advises investors who base their equity exposure on the behavior of insiders to ''sit tight and watch both stock prices and insider trading'' in the coming months.

    Only if prices begin to decline from current levels and insider selling continues or accelerates would he recommend getting out of stocks.