Sunday, November 4, 2012

Does Insider Selling Signal A Market Top?

While browsing through Dunkin Brand Group's (DNKN) financial pages, something disturbing but not too uncommon these days caught our attention. Insiders have been selling the stock like there is no tomorrow, with $7 million worth of shares sold in February and March 2012. Yes, we understand DNKN went public about eight months ago and insiders are now allowed to legally sell shares. But the volume is noteworthy, not just in DNKN but in other companies as well, suggesting a pattern that is explained below.

Five-Year Market Pattern: DNKN's insider selling prompted us to look further into recent insider selling in the market and see if some pattern could be deduced. Thanks to Thomson Reuters, we got the answer. Insider selling throughout the market is at its highest since May 2011 and everyone knows what happened to the market the next few months. The data shows that in February 2012 insiders sold $44 worth of stock for every dollar spent on buying, the highest in over a year. This could be a sign of things to come as insiders have the best knowledge about the intermediate prospects of their firms.

The article linked above further explains that each peak in the five-year chart below (highest insider selling point) has been followed by a sharp fall in the overall market.

Click to enlarge

Activity By Index: Let's take a look at one more chart. This chart shows the sell to buy ratio for the three main indexes; Dow Jones, S&P 500 and Nasdaq. Nasdaq had the hardest fall after insider selling peaked, followed by the S&P 500. Dow Jones was the most stable of all and understandably so because of the blue chips in the index.

Click to enlarge

Some Prominent Insider Sells:

  • Chipotle Mexican Grill's (CMG) CFO Mr. Jack Hartung sold approximately 24,000 shares valued at $13 million since the beginning of March.
  •'s (CRM) Vice Chairman Mr. Frank Van Veenendaal's numbers pale in comparison to CMG's CFO. But since March 1st, MR. Veenendaal has sold shares worth about quarter of a million dollars.
  • Dunkin's Chairman and former CEO Mr. Jon Luther sold $2.3 million worth of shares since March 1st 2012.

On A Brighter Note: To sign off on a positive note, a stock that we love, Philip Morris (PM) is one of the few companies which had a recent insider buy. Investors would do well sticking with rare exceptions like these even if the market sells off.

Conclusion: While we understand the macroeconomic conditions are much better in 2012 than they were in 2011 and the other periods referred in the charts above, it's hard to ignore the pattern in the charts, especially the five-year chart. Seeing that the Nasdaq is up 20% YTD (let's face it, it's mainly due to Apple (AAPL)), it won't be a bad idea to take profits of your tech stocks. You might also want to consider allocating more to safer dividend paying stocks with good fundamentals and stronger balance sheets.

Disclosure: I am long AAPL, PM.

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