Insider Action Says It's Not Too Late to Sell

This (hopefully) once-in-a-generation stock market dislocation has insiders buying their sinking shares much more while also selling much less. That has generated increasingly positive insider buy/sell ratios, which I calculate every week in my InsiderInsights newsletter.

Alas, as I explained in my Oct. 7 column, increasingly positive insider buy/sell ratios usually correspond with continuing market weakness. The time to get bullish is when the ratios actually peak and start inflecting lower.

With so many stocks already looking way oversold, isn't it too late to start shorting? Judging by historical valuations, perhaps. But that seemed to be the case a couple weeks ago as well, and many stocks have casually given up 10% or more since then. Considering the likelihood of more weeks or months of depressing economic headlines, at least one more round of double-digit declines will unfortunately be on the way for many stocks.

An excellent screen for finding losers that could become even bigger losers is to look for weak stocks that also have insiders selling them significantly. It is not common at all for insiders to sell shares as their stock is trending downward or is well off its yearly highs. When you do see this selling pattern, it's a big red flag for that stock's prospects.

A table of stocks waving this red flag from insider filings made in the first half of November is given below. In my experience, these stocks tend to underperform the market, and -- though already off big from their highs -- represent a good list to comb through for short ideas. At the very least, stocks on this list should be scratched from consideration for bottom-feeding.

This is particularly true of stocks that have trended steadily downward and yet still have insiders selling. Other stocks on this table, however, may have recently bounced strongly from lows but still are well off their yearly highs. In these cases, the selling raises the question of whether the rebound is deserved.

I've been short Riverbed Technology (RVBD - commentary - Cramer's Take), Google (GOOG - commentary - Cramer's Take) and PetSmart (PETM - commentary - Cramer's Take) at various times over the past year, with profitable results. My big mistake was closing all my shorts too early during October's weakness and not continuing to use my weekly "Short Sighted" tables (as they are called in InsiderInsights) to layer on the negative bets. At the very least, the little bottom-fishing I've attempted over the past month should have only been done as a piece of a paired trade.

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At the time of publication, Moreland had no positions in stocks mentioned, although holdings can change at any time. Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.