No need to panic over insider selling

Mark Hulbert reported that, according to Vickers, insiders are turning to the sale of equities after turning bullish in late November:

Corporate insiders are no longer on the side of the bulls.
This represents a remarkably quick shift from the situation that prevailed just one month ago, when the average insider was behaving quite bullishly. ( Read my Nov. 21 column, “Insider behavior points to imminent rally.” )

After all, the stock market is barely 4% higher today than then. And though a return of that magnitude in one month’s time is nothing to sneeze at, is that really enough of a rise to justify such a big shift in insider behavior? Either something has led them to change their minds about their companies’ longer-term prospects, or they have become short-term traders like the rest of the market.

It’s probably a little bit of both. Since the government doesn’t gather data on the reasons for insiders’ behavior, we don’t know for sure.

He concluded that:

But regardless, the picture the data paint is unmistakably bearish.

I beg to differ. There are a couple of one-off reasons that could account for the flurry of insider sales:

1. They are selling in anticipation of the end of the world, as predicted by the Mayan calendar; or
2. They are selling in anticipation of higher capital gains taxes in 2013, especially when it appears a fiscal cliff deal is near.

Assuming that the Mayan Apocalypse doesn't happen this Friday (here is one way you hedge the end of the world), there is no need to panic just yet. Explanation #2 is a perfectly plausible reason for the rash of insider activity as 2012 draws to a close. In that case, I would wait for the insider activity data in January to see if insiders are indeed selling because of deteriorating corporate fundamentals, or for tax related reasons.


  Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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