What to Do When Insiders Exit

If this resistance metric holds this time around, this rally is already more than half over. Of course, if the indices do break through their 50-day averages with gusto, I'll be eatin' crow big time. But when I weigh the odds of whether the current downward-sloping range will be broken on the up- or downside, I still think the latter is more likely. To break out on the upside, there would have to be fabulous news flow from government economists and corporate earnings. For the next few months, at least, I think the opposite is much more likely. And while the stock market is a forward-looking animal, I don't think we are far enough through this credit crisis for the animal to turn sustainably bullish right now.

But to heck with my top-down drivel. Reasonable minds can differ about where the indices are headed in the coming months. If I'm wrong and this latest rally really did mark the bottom for the year, I'll jump on board in short order.

Short-Sighted

If you're in the bearish camp yourself, however, the good news is that insiders are throwing up plenty of quality ideas via their selling activity. Too often, the insider approach is pigeonholed as a way to find good value stocks in a bull market. But as my recent experience illustrates, insider data are a much more versatile input to the investing process than that.

Three of my latest shorts are Google (GOOG Quote), Vocus (VOCS Quote) and American Public Education (APEI Quote). The thesis behind all three of these shorts is similar: Insiders are selling them even though their stocks have already fallen hard. That's always a red flag. Technically, all three appear to still be in solid downtrends. Fundamentally, all these stocks also appear pricey despite their stocks being well off recent highs. So even if the market does rebound, I expect these stocks to perform relatively worse than the numerous longs I am still in.