Is Another Stock Market Collapse Imminent?

June 25, 2009 | From theTrumpet.com

Strong insider trading could mean that bad news is just over the horizon.

Business owners are losing faith in the companies they run. U.S. business executives are selling shares in their companies at the fastest pace since the credit crunch began two years ago, reports show. This may indicate an impending stock market slump.

“Historically, insiders have been a leading indicator of where the market’s going to move, and we’re seeing a clear indication that insider sentiment is becoming more neutral if not approaching bearish levels,” says the editor of Vickers Weekly Insider Report, David Coleman.

“Insiders” are company executives and directors, who usually know best how their companies are doing. They have information not available to the public. For these reasons, they are required by law to report how much stock they buy and sell.

Data compiled by InsiderScore.com shows that insiders working for companies on Standard & Poor’s 500 index were net sellers for 14 weeks straight.

Three months ago, insiders were buying shares in their own companies as the S&P 500 index reached its lowest level in over a decade. Now they have shifted from buying to selling in a big way. TrimTabs Investment Research reports that insiders have sold $2.6 billion worth of stock so far this month. That is 22 times the $120 million in stock they have bought: a ratio of $22 sold for every $1 bought.

Bloomberg reports:

Sales by ceos, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.

“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock-price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based rbc Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”

Historically, this has not been a good sign, as Bloomberg points out:

The last time there were more U.S. corporations with executives reducing their holdings than adding to them was during the week ended June 19, 2007, the data show. The next month, two Bear Stearns Cos. hedge funds filed for bankruptcy protection as securities linked to subprime mortgages fell apart, helping trigger almost $1.5 trillion in losses and write-downs at the world’s biggest financial companies and the 57 percent drop in the S&P 500 from Oct. 9, 2007, to March 9, 2009.

Insider selling during the height of the dot-com bubble in the first quarter of 2000 climbed to a record $41.7 billion on a net basis, according to data compiled by Bethesda, Maryland-based Washington Service. The sales coincided with the end of the S&P 500’s bull market and preceded a 2½-year slump that erased half the value of U.S. equities.

Not all experts agree that another stock market fall is coming. The director of research at O’Shaughnessy Asset Management, Bill Latimer, doesn’t believe that insider selling is a good way of forecasting stock performance. “When you’re dealing with an individual’s buying or selling, you’re clouding the picture with what their specific financial situation may be,” he said.

Nevertheless, the whole American financial system is in uncharted territory. A major crash is coming, at some point soon. This collapse, however, will eventually have a good outcome. To find out how, read “The Future of Money.” •

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