Insider purchases of company stock are rapidly evaporating in the current market, which could be a signal that it may be time to get out. The ratio of officers and company directors who were buying up shares of their companies has dropped by almost 45% from this time a year ago, and only 316 of these insiders bought stock in July of this year, according to data from Bloomberg and the Washington Service.
Meanwhile, the data shows that nearly 1,400 insiders dumped shares in July, which is a number that has only ever been exceeded twice before. The demand for company shares by insiders has dried up despite the fact that companies themselves are continuing to buy back their shares in the open market. This hesitation on the part of the insiders marks a departure from last July and this February, when they rushed in to buy shares during the two sharp sell offs that occurred. (For more, see: When Insiders Buy Should Investors Join Them?)
James Abate, who helps to manage $1 billion as chief investment officer for Centre Funds in New York said, “It’s people who are looking at the fundamentals of their business every day and seeing a picture that’s deteriorating. Combine that with the lofty stock valuations makes the market vulnerable for some degree of correction.”
He went on to say that his firm has purchased put options on the S&P 500 Index in order to protect the company from a possible market sell off. Corporate insiders seem to be likewise bracing for a fall, as only two insiders are now buying for every nine that are selling. The current buy/sell ratio for insiders of 0.23 is only a third of what is was back in February and is well below its average of 0.69. The forecast for corporate profits likewise continues to be pessimistic, as analysts see profits declining for a sixth consecutive period. (For more, see: Keeping An Eye on the Activities of Insiders and Institutions.)