Insiders Sell, Time to Rebalance

Director dealings show nerves...

 

ONE informal indicator market watchers like to keep an eye on is 'director dealings', writes John Stepek at MoneyWeek.

 

When a director buys or sells a significant chunk of shares in the company they work for, it always draws attention. After all, who is better placed to know a company's prospects than those who run it?

 

This is why "insiders" are only allowed to buy and sell shares in their own firms at certain times – eg, a CEO can't buy or sell in the run-up to their annual results coming out (this is known as a "closed period").

 

Big buys by an insider are obviously bullish. Big sales don't look so good. Yes, they might be needed to resolve a divorce or a tax bill, but it's rarely good news to see top managers baling out of their own stock.

 

So it's a bit worrying that sales by "insiders" across equity markets as a whole are now running at their highest rate in 20 years, according to data from Smart Insider, reported in the Financial Times.

 

So far this year, insiders have sold around $19bn-worth of equity in their companies. If this continues until the end of the year, they'll have offloaded $26bn. That would be the highest annual total since 2000, when the technology bubble peaked – back then, insiders dumped $37bn of stock.

 

Insider sales then peaked again in 2007, just ahead of the global financial crisis. This latter high wasn't surpassed again until 2017.

 

Taken individually, these sales aren't necessarily due to bearishness. For example, more than $2bn (ie, more than 10%) in sales came from the Walton family, founders of US retail giant Walmart. This appears to be for primarily technical reasons: they're not selling because they think Walmart is in trouble – they're selling to prevent their percentage stake in the group from rising further due to share buybacks.

 

However, other research also hints that wealthy people are taking money off the table. The latest UBS Global Family Office Report (in association with Campden Research) found that a majority of family offices (each managing an average of more than $900m) reckon there will be a recession next year, while nearly half are boosting the amount of cash they hold, reports Bloomberg. And last month, a report from TrimTabs Investment Research found that in August, insiders sold more than "they have at any other point during the bull market, which began in March 2009", notes CNN.

 

In short, insiders aren't happy. It doesn't mean a crash is imminent, but if you haven't rebalanced your portfolio in a while, consider whether it's time to take profits on any holdings that have grown out of line with your original asset allocation and perhaps top up your own cash reserves.