One of my favorite indicators is based on the commitment of traders (COT) data, which I discussed in the article titled "Trade with the Experts." In that article I stated that using the COT indicator "is almost like trading with inside information - legally." If the COT indicator is good, then trading with the actual corporate insiders must be even better.
Elevated ratios of corporate insider selling to buying can provide early warnings of market tops. According to Vickers weekly Insider Report, that ratio is currently more than twice its historical average.
Corporate Insiders are Extremely Bearish
I have been aware of this indicator for some time, but did not realize that it was at such an extreme level until reading a recent article on MarketWatch.com titled Insiders Betting on a Correction written by Mark Hulbert. In the article, Hulbert explains how to interpret the recent indicator values:
"Consider a ratio of the number of shares that insiders have sold to the number that they have bought. According to the Vickers Weekly Insider Report, published by Argus Research, the average level for this ratio over the last four decades is between 2-to-1 and 2.5-to-1. Any level below this average is considered bullish, while higher levels are bearish.
According to the latest issue of Vickers Weekly Insider Report, for the week that ended last Friday this sell-to-buy ratio stood at 5.50-to-1. At the early-May bull market high, in contrast, the ratio stood at 5.71-to-1."
Given the plethora of economic warning signals that are currently flashing red, the extreme level of net-selling by corporate insiders is troubling, especially entering a critical earnings season.
This ratio of insider selling to buying is a measure of market sentiment. Corporate insiders would be considered "smart money" as would the commercials in the COT report - at least at the extremes. The rule with market sentiment indicators is to always trade with the smart money and against the uninformed masses. In this case, the smart money is running for the exits
Your comments, feedback, and questions are always welcome and appreciated. Please use the comment section at the bottom of this page or send me an email.
Do you have any questions about the material? What topics would you like to see in the future?
If you found the information on www.TraderEdge.Net helpful, please pass along the link to your friends and colleagues or share the link with your social network.
The "Share / Save" button below contains links to all major social networks. If you do not see your social network listed, use the down-arrow to access the entire list of social networking sites.
Thank you for your support.
Copyright 2012 - Trading Insights, LLC - All Rights Reserved.