A surge in company insider selling is raising red flags about the direction that U.S. equity markets may be heading. Insider selling soared in November to $7.6 billion -- the second-highest level this year, according to TrimTabs Investment Research.
"Insiders aggressively ramped up their selling in the wake of the big October rally, which is a cautionary longer-term sign for U.S. equities," said David Santschi, chief executive of TrimTabs.
The last time corporate insider selling was higher was in May, and the S&P 500 fell 3% in June and 6.4% by the end of the August, he noted.
He said there's no correlation between year-end tax-loss selling by investors and insider selling. "Investors do it," but there is no historical trend for insiders doing it.
"There's no seasonal pattern for November to be unusually heavy," he added. He noted that insider selling in November 2014 was $5.8 billion.
When corporate insiders -- officers and directors who run U.S. public companies as well as major shareholders who own more than 10% of a company's voting shares -- start showing signs of weakness, investors need to pay attention, he said.
"Given the lofty valuations of U.S. equities overall, I'm only surprised it isn't even higher," said Santschi, who's been beating the drum about a possible slowdown for some time. "We're seeing corporate activity that's consistent with what we would see at a top."
The surge in insider selling is just the latest warning bell to chime. Record-high cash merger activity along with a slowdown in stock buyback announcements are also raising flags about the direction U.S. equities are heading, he said.
Indeed, the volume of merger-and-acquisition activity in the U.S. so far in 2015 has exceeded $2.3 trillion -- an all-time record high - according to Dealogic.
At the same time, the volume of stock buyback announcements is waning. After peaking at about $133 billion in April, buybacks have fallen to less than $55 billion a month in six of the past seven months, Santschi said.
"We don't think the economy is rebounding -- we think it's slowing," said Santschi. "Our proprietary macro-economic index is near an eight-month low. We also track real-time tax collections reported to the U.S. Treasury and the growth in those collections has dropped to the lowest level this year."
He noted that the latest ISM Manufacturing index, which monitors employment, inventory and orders at manufacturing firms, contracted in November for the first time in 36 months.
If the Federal Reserve proceeds with plans to raise interest rates this month, he believes it could accelerate the slowdown.
"I think it could have a very big impact," he said. "We've had rates at zero for almost seven years and there's been a lot of debt accumulated on the corporate side, and if we start having multiple rate hikes, that would have a slowing effect."
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.