Courtesy of Paul Price
Five weeks ago I wrote that the Thomson Reuters Insider Transaction Ratio was screaming ‘caution’. An excerpt of that May 11, 2013 column is shown below:
"A normally reliable short-term indicator is looking bearish.
"Insiders, on balance, always sell more shares than they buy because they receive so much stock through employee compensation and bonus plans. The Thomson Reuters Insider Transaction Ratio considers it bullish when company officers and 5%+ holders, as a group, sell less than twelve times the dollar amount that insiders are buying. When that ratio exceeds 20:1, it is considered to be bearish, signaling widespread distribution.
"This indicator has proven fairly accurate looking out weeks to months. It is too volatile to be useful for longer periods. I matched up the past 12-months signals to the movement of the SPY (S&P 500 ETF) to illustrate where it went right and wrong.
"The twin bearish insider selling peaks last September and October appeared to have provided valuable advanced warning of the sell-off that ended in mid-November. The short burst of intense insider selling that took place this past January ended up being a false negative. Five of the six major ‘buy’ signals worked out well.
"Both the SPY and Dow Jones Industrials closed at new all-time highs last week. Company officers have been active sellers. The Thomson Reuters Ratio is back in dangerously high territory. Will this be a good signal or a misleading one? Only time will tell."
That extremely bearish signal turned out to be less than perfect.
The S&P 500 and the DJIA both moved higher for another seven or eight trading sessions before reversing trend. They have, however, gone sideways since the insider signal flashed the yellow caution light.
What is the insider transaction ratio saying about the mid-June market? It has come back into neutral territory.
It appears that the last year’s signals have been more predictive on the bullish side than the bearish side.
Stay tuned for further updates as the remainder of 2013 unfolds.