Corporate Insiders Bailing Out of Stocks

budget deficitThere are many reasons to be skeptical about this past January’s market rally. One of the most important key indicators flashing a warning sign is the fact that the stock market’s big rise in January occurred on very light trading volume.

But there’s another key indicator that is also flashing a red warning sign: insider selling.

Insiders are officers, directors and the largest shareholders of corporations. It is critical to follow whether insiders are buying or selling their company’s stock; it could be an indication that they expect to see their company’s stock rise or fall in price.

When insiders are buying, investors usually think it is time to buy. When insiders are selling, it could mean something is up, and so investors might consider selling.

Argus Research has posted some alarming numbers from their corporate insider key indicator concerning the overall market, to which investors should pay attention. Their ratio showed that insiders are selling their shares at a pace not seen since July 2011. If you remember, dear reader, the market proceeded to fall dramatically in August, September and October of 2011.

Their key indicator, the corporate insider sell-to-buy ratio, stood at 5.77-to-1, which means that, for every 100 shares corporate insiders bought, 577 shares were sold by insiders of the company for which they work. If companies listed on the New York Stock Exchange are taken in isolation, this key indicator gets worse…8.2-to-1.

To put some perspective on this key indicator, in November of 2011, before the over 25% market rally began, the sell-to-buy ratio stood at 0.81-to-1, which means that, for every 100 shares insiders bought, only 81 shares were sold.

The recent corporate insider selling was confirmed by Trim Tabs Research. Their key indicator showed that insider selling for the month of January was five times insider buying, which, has thus far—for the month of February—increased at an alarming 15 times. For their key indicator, the interpretation is that, in the January market rally, for every 100 shares bought by insiders, 500 shares were sold. From February 1 to 13, the selling is accelerating rapidly: for every 100 shares bought, 1,500 shares were sold.

Insider selling, in isolation, cannot be the sole key indicator on which a buy-or-sell recommendation can be made. These numbers confirm the bear market trap that is currently playing itself out with this market rally. It seems that, while a few people were buying in January’s market rally (as evidenced by very low trading money), the smart money (corporate insiders) were selling into this market rally. Sounds like the smart money is the one to heed, dear reader.

Michael’s Personal Notes:

I was very confident I was going to be right about calling for a fifth consecutive year of trillion-dollar budget deficits, but I’m surprised myself at how quickly I would be proven right.

Just a few weeks ago, I commented on the Congressional Budget Office’s (CBO) forecast for budget deficits in future years. (See: Getting Used to Trillion-dollar Annual Deficits.) Again, I want to reiterate, this was not and still isn’t a criticism of the CBO, because it has to project budget deficits based upon the current laws and tax cuts in place.

At the time, I warned that the then 2013 budget deficit of only $585 billion was not going to materialize. The only way this number could be reached would be if taxes increased dramatically, which, considering such a weak economy, was not going to transpire…is what I argued. When President Obama released the budget this week, he asked Congress to extend the payroll-tax cut and the unemployment insurance benefits until the end of 2012.

Should President Obama win the election and his budget pass into law (highly unlikely), then the projected budget deficit for 2013 will be $901 billion. Compound this with the 2012 budget deficit now expected to come in at a worse level than previously projected of just under $1.3 trillion from a previous estimated $1.1 trillion.

Since the 2013 budget deficit has now moved from $585 billion to $901 billion, I’m sticking to my forecast of the budget deficit for next year surpassing the $1.0-trillion mark by a large margin.

The proposed budget sees the top individual tax rate rise to 39.6% from 35%. The budget would treat dividends like regular income and remove other tax benefits from the wealthy. (There is no way that Congress is going to approve such a spike in taxes.) While the budget acknowledges that Medicare spending will increase dramatically from 2013 and on, it offsets this by saying that defense spending will fall.

The defense spending cut has a lot to do with closing out the campaign in Afghanistan, but the tensions with Iran have been escalating dramatically. A war with Iran could throw these budget deficit projections right out the window.

The Republicans will release their recommended budget soon. They are going to target different tax cuts and revenue priorities, so both parties will debate their philosophical approaches to the electorate on how to best move forward in this country.

What is frightening is—I’m almost certain—that no matter what budgets and tax cuts either party presents, neither will prevent annual trillion-dollar budget deficits in the next few years. They’ll say they’ll tackle the issue, but, in future years. (Stop me if you’ve heard that one before!)

All I know is that taking the budget deficit projections in this budget right to 2016, and giving myself an error cushion of just five percent on the budget deficits, will ensure that our debt-to-GDP will be roughly in the vicinity of 130% by the end of either President Obama’s second term or the new President’s first term. Welcome to Greece…

These unprecedented trillion-dollar budget deficits mean more money printing and a continued rise in the price of gold bullion and will certainly put upward pressure on interest rates…faster than we can imagine. Protect yourself, dear reader. (Also see: Could the U.S.’s Credit Rating Be Downgraded Again?)

Where the Market Stands; Where it’s Headed:

I wrote yesterday morning about how I was getting uncomfortable with so many stock advisors turning bullish and—bang—the Dow Jones Industrial Average has its worse day of the year, down almost 100 points yesterday.

Dear reader, we need to get ready for big one-day drops for the stock market. They will become the norm when Phase III of the bear market starts. But I still believe there is more life left in the bear market rally (or should I say sucker’s rally) that started in 2009.

 What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.