Behind The Money, by Executive Producer John Melloy of Fast Money:
The pace of insider selling is picking up, and insider buying is drying up, as earnings season begins, begging the question for those investors bidding the S&P 500 towards a new 2010 high: Should you believe CEOs actions or their earnings reports?
Over the last eight weeks, on average, more than three shares were sold for every one that was bought by insiders, according to Vickers Weekly Insider newsletter. In the last week, insiders are selling at a five-to-one clip. Over time, about two sales for every one purchase are considered normal when taking into account options plans and other pre-set selling plans.
"The continued deterioration of overall insider sentiment while the market has ticked higher is further short-term reason to capture gains and cut losses as we see it," said David Coleman, editor of the newsletter.
Salesforce.com (CRM), Autozone (AZO), Google (GOOG), Netflix (NFLX) and Panera Bread (PNRA) are among the stocks pointed out by the publication with over 40 sale transactions and zero buys over the last 90 days.
Meanwhile, investors have taken the other side of that trade, bidding the S&P 500 up to the highest since May and near its 2010 closing high in anticipation of this coming earnings season. Intel, JPMorgan and Google highlight the earnings this week, but things really start to pick up next week.
"If you look at the latest business confidence surveys, then this insider selling doesn’t surprise me one bit," said David Rosenberg, Chief Economist and Strategist for Gluskin Sheff, who gained a maverick reputation as correctly being bearish in his prior role as Merrill Lynch's economist. "While portfolio managers can’t be blamed for turning bullish — after all, it's in their DNA — the typical business executive doesn't seem to share in the same degree of ebullience over the outlook for the economy even with Ben Bernanke's helicopter flying manual."
Monday, the widely watched National Association of Business Economics panel, made up of economists at companies such as Ford and DuPont, as well as academics, reduced its forecast for annual economic growth to just 2.6 percent for 2010 and 2011.
Rosenberg says investors are too quick to forget that Intel, which reports today after the bell, lowered its revenue and profit margin guidance at the end of August.
To be sure, Vickers points out that the volume of recent insider transactions has fallen because of restrictions that typically surround earnings reports and that light activity could skew some of the figures.
Still this trend didn't just begin last week.
"Typically, insider sentiment such as we are currently seeing leads us to become cautious but not necessarily outright bearish," said Coleman in the note. "However, should we see a decline in the overall market of more than a few percentage points, we’ll consider going to an all-cash position in stocks held in our model portfolios that have not enjoyed recent insider support."
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