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Where the Selloff Isn't Over

This column was originally published on RealMoney on June 1 at 1:30 p.m. EDT. It's being republished as a bonus for readers.

It is an absolutely awful sign about a company if, after the recent broad selloff, insiders are still selling shares. At best, it indicates a lack of faith that the stock will recover soon. At worst, it could be a sign that executives are afraid that they had better get out now before shares fall even more. These are stocks that I'd suggest investors forget about bottom-feeding on. A little leg work could even uncover a decent short-selling opportunity.

Unlike the recent buy-side activity of insiders, which shows a couple of trends, the sellers are spread over several industries. Although biotech and technology are well-represented in the selling, those sectors also had some noticeable buying as well, so any red flags that appear are likely company-specific.

Shares of United Therapeutics (UTHR - Get Report) started to slump before the market selloff after accounting changes reduced first-quarter profits. The technical condition of the stock has been steadily breaking down since. After a four-year run that took shares from $10 to nearly $80, United Therapeutics' 50-day moving average recently crossed below its 200-day average.

The heavy insider selling over the past few years -- particularly option-related selling -- was unremarkable, given its strong performance. But the fact that insiders have continued to sell with their stock now 35% below its recent highs tells me that they don't believe new highs will be seen any time soon.

Shares of Onyx Pharmaceuticals (ONXX) also are off by nearly a third over the past three months, but that hasn't dampened the enthusiasm of executives to flip their options for a risk-free profit. Even recent upgrades of Onyx by Wachovia and Prudential don't appear to have halted the slide.

Corporate spokesmen sometimes argue that options-related selling isn't really meaningful. Don't fall for that line. If executives really thought it likely that their shares were going to rebound from the depths, they would postpone the exercise. Options do not stymie an executive's free will.

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