Alan Abelson points to an interesting chart from Trevor Greetham, Merrill Lynch’s chief of global asset allocation. It shows the historical correlation going back 15 years or so between insider sells and the markets subsequent performance:
click for larger graphic
graphic courtesy of Barron’s
". . . His calls have been pretty much on the money for at least three years running, so if he’s uneasy, it’s not a bad time to take some money off the table. He has some interesting company: directors of public companies have turned pronouncedly bearish. Take a gander at that chart nearby, what it depicts is the ratio of directors buying their companies’ stock to directors selling their companies’ stock going back to 1980. It also tracks the S&P 500 index over that stretch.
As you can see, at last count, more than six directors were selling for every one that was buying, a ratio, Trevor informs us, exceeded only once before in 30 years. This is not, he comments, a contrarian indicator. Directors, in fact, have had a pretty good record in timing the highs and lows in the market."
I find the chart intriguing, and its yet another piece of the puzzle supporting an eventual denouement (though Greetham’s top is sooner versus my later).
But a few caveats are definitely in order:
- Since the comparison is between insider sells to the S&P500, the chart should really show SPX directors — or use a Wilshire 5000 graph. Remember, we are trying to create a correlation, and the variables should match as well as possible.
- Most of the chart covers the 1982- 2000 Bullmarket. It may not correlate well to a period including a significant Bear Market (2000-2003, or 2000 – ? if you care to be precise);
- I’d also like to see if there has been a significant change in the predictive abilities of insiders from the 1980s til now. Today has more outside directors, different treatment of options, and a variety f other variables that could impact this study.
All that said, its an issue worth watching.
Up And Down Wall Street
Barron’s Monday, December 20, 2004