Insider Sentiment ETF Shows More Promise Than Insider-Selling Data

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( ETF Expert) -- According to Paul La Monica at CNN Money, insider selling is near its highest levels in a decade.

Specifically, nearly 1,800 S&P 500 executives cashed in shares over the most recent three-month period.

Does this mean that the smart money is leaving equities? Or do permabears love to point at everything and anything that strengthens their permanently pessimistic viewpoint?

Historically, insider buying is far more worth following than corporate insider selling. Executives may sell shares to diversify assets, prepare for retirement, make a large discretionary purchase or protect against stock price depreciation.

On the flip side, however, an insider's chief motivation to buy company stock is to make money from capital gains; he/she thinks the stock price is going higher.

Still, the potency of insider information -- buying or selling -- is suspect. For example, the majority of executives in 2008 were buying before the systemic collapse. In fact, according to Mark Hulbert, most insiders were more bullish in January 2008 than they were in October 2007, when the recession first began.

Questions regarding the helpfulness of insider purchasing info also arise when one compares the Guggenheim Insider Sentiment Fund ( NFO) against an appropriate benchmark.

This ETF seeks to replicate the performance of the Sabrient's Insider Sentiment Index where Sabrient developed a quantitative stock-picking method based on insider buying trends. NFO is classified as a mid-cap blend fund, which implies that it should be compared to the S&P Mid Cap 400. Note: iShares tracks the index with iShares S&P Mid Cap 400 ( IJH).

Since the September 2006 inception date, NFO has outperformed IJH by 8%. This may give some credence to the notion that insider purchases can provide insight on when to buy.

Executives may sell for reasons other than to protect principal, and this may make insider selling data less powerful. Still, there are instances when insider selling has been informative.

Consider July of 2011. Corporate insiders were selling shares of their NYSE- and AMEX-listed companies at the fastest rate since the early 1970s. The reality that many were selling near the summer lows rather than selling near the spring highs of April likely demonstrate that execs can come unglued -- just like the general public.

Nevertheless, when one considers the accumulation of information -- falling Treasury bond yields, dollar outflows from global equity funds, benchmark declines since earnings season began, increasing CBOE VIX volatility, sovereign debt crisis flare-ups -- the insider selling data begin to look prescient.

You don't have to run screaming for the exits, though. It makes far more sense to employ appropriate ETF hedges as well as use sensible stop-loss orders; in that manner, you won't be prone to selling stock ETFs in an undisciplined frenzy.

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Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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