Corporate Insiders Dumping Stocks at Alarming Pace

Dumping StocksThe S&P 500 broke out to a new 52-week high last week, but still trades below its 1997 high. As the S&P 500 has been rising, I have been skeptical, especially when it comes to participation. Trading volume has been light. The two backbones of a healthy stock market rally are increased volume and rising corporate profits—both of which elude this stock market rally.

If I didn’t know better, I’d have to say that in the case of the current stock market rally we are witnessing in the S&P 500, it is running up on nothing more than thin air.

In these pages, I have already discussed the “triple top formation” on the S&P 500 chart.

But there is more evidence that the current rise in the S&P 500 is a sucker’s rally.

So far this year, chief financial officers (CFOs) of the largest U.S companies sold $895 million of their company’s stock—19% higher than the same period last year and eight times higher than in 2009. (Source: Wall Street Journal, August 28, 2012.)

Corporate insiders are the directors and officers of a public company. In a perfect world, they should know what is happening in their business and what should happen to their business in the near-term future. If corporate insiders are aggressively selling as opposed to buying during a stock market rally, investors should take note.

According to Vickers Weekly Insider Report published by Argus Research, in the last week of August, the ratio of shares sold by insiders versus shares bought was 5.97 to 1. This means that insiders bought only 100 shares for every 597 shares they sold. (Source: Market Watch, September 5, 2012). Clearly, the ratio is a warning from corporate insiders about the current stock market rally.

On the same note, other investors are fleeing the U.S stock market rally. There was an outflow of $3.71 billion from U.S stock market mutual funds in last week of August. The total money outflow from U.S stock market mutual funds in August was the highest since the month of April—$18.85 billion, compared to $14.92 billion in April—another negative for the stock market rally. (Source: Investment Company Institute, September 5, 2012.)

The poor fundamentals of the economy have not changed. Businesses are still facing hardship. The economic outlook is bleak at best. For a continued stock market rally, companies have to perform well, but S&P 500 companies could actually see negative revenue growth in this current third quarter. (See: “Negative Revenue for S&P 500 Companies Signals Recession.”)

Beware that stock market rally, dear reader; it’s nothing more than a sucker’s rally.

Michael’s Personal Notes:

I am going to say it one more time, gold bullion prices are going higher. The shares of quality junior and senior gold mining stocks offer tremendous opportunity for investors.

World central banks will increase gold bullion purchase to 439 metric tons in 2012 to diversify their foreign exchange reserves, and protect themselves against inflation. (Source: Bloomberg, September 4, 2012.)

These central banks have bought 34% more gold bullion in the first half of 2012, compared to first half of 2011. Could central banks be running to gold bullion as a safety net to inflation? Or could they be protecting their reserves from a falling U.S dollar?

Here in the U.S., the job report this past Friday has increased the chances the Federal Reserve will intervene in the markets and try to stimulate the economy once again via a third round of quantitative easing (QE3). It’s a fancy name for more money printing. We had an increase in the Fed’s balance sheet of $1.25 trillion from 2008 to 2010 (QE1), then $600 billion from 2010 to 2011(QE2). (Source: Bloomberg, September 7, 2012.)

There is no clear indication of how much money the Fed will print in its next round, but I do know that, the more it prints, the more inevitable the devaluation of the U.S. dollar is. Gold bullion can definitely provide safety against a falling greenback.

Not only does increasing demand from world central banks dictate that gold bullion prices are headed higher, but also, looking at the gold bullion price chart, the picture become clearer. It shows another reason to believe that gold bullion prices are heading higher. (Also see: “China to Become World’s Biggest Buyer of Gold in 2012.”)

Gold Spot Price Stocks Chart

Chart courtesy of

Looking at the chart above of gold bullion prices, we can see there was a consolidation period in which the price moved into a narrower and narrower trading range. In technical analysis terms, this type of consolidation is called a “symmetrical triangle”—a pattern that shows a trading range getting smaller with time for which price direction can only be predicted after the price breaks above or below the trading range (black lines).

Last week, gold bullion prices broke to the upside of the symmetrical triangle (green circle). Technical analysts would agree this is a bullish sign and we are going to see higher prices for gold bullion.

Gold bullion has gone up significantly since the recession of 2008-2009. The recent consolidation in gold prices was much needed, as an “uptrend” without any consolidation is usually a sign of a bubble—something not present in gold bullion prices.

Gold bullion prices reached $1,920 an ounce back in September of 2011—the highest price ever. Money printing by world central banks, the devaluation of the U.S. dollar, and inflation fears will eventually propel gold bullion prices much higher.

Where the Market Stands; Where it’s Headed:

There’s not much else I can say about the stock market I haven’t already said in my lead article today. I believe we are near the end of the bear market rally that started in March of 2009. This is a “sucker’s rally” also often referred to as a “dead cat bounce.”

The purpose of a Phase II secular bear market (where I believe we currently are) is to lure investors back into stocks with the false sense that the economy is improving and that stocks are a good place to be again. In reality, the stock market has only held up the past three years through artificially low interest rates, record government debt, and money printing—there has been no structural improvement to the economy.

What He Said:

“The Dow Jones Industrial Average, the S&P 500, and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in Profit Confidential, November 29, 2007. The Dow Jones Industrial Average peaked at 14,279 in October 2007. A sucker’s rally developed in November 2007, which Michael quickly classified as a bear trap for his readers.” By mid-November 2008, the Dow Jones Industrial Average was at 8,726.