Late Inning in the Rally

Nothing lasts forever, and market bulls like myself, who profitably have ridden this latest rally, were reminded Monday not to get too complacent about the longevity of the current run. While Monday's day of "distribution" (by most technical definitions) did not flip my insider-based market call to bearish yet, insiders do seem to be indicating that the current rally is in late innings.

I compile my insider buy/sell ratio a little differently than most other services. Instead of relating dollar values of total insider purchases and sales, I take the ratio of the number of companies with open-market purchases vs. open-market sales. There are logical pros and cons to the various insider ratio methodologies. Generally speaking, however, they have tended to paint similar pictures.

As the chart below shows, the rolling four-week average of my weekly insider buy/sell ratio continues to fall.

As is graphically clear in the chart, the deterioration itself is actually a normal occurrence during a leg up in the market.

The initial inflection downward in this ratio is actually a trigger for establishing a buy signal, the latest of which happened (admittedly a few weeks prematurely) in early July.

Click here for larger image.

Source: InsiderInsights.com

But over the past three years, short-term market tops have tended to occur when the rolling four-week average has dipped to negative 200% or below, indicating that there were 200% more companies with insiders selling in the open market vs. buying.

Well, as of last week, the rolling four-week average finally fell below that important threshold to negative 204%. That fact already prompted me to focus on shorter-term technical systems to help confirm when my insider-based indicators may be signaling a change in market direction. Interestingly, the market acted technically ill on the first trading day after my indicator fell below the negative 200% threshold.

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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.