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Insider selling within general market may tank auto sector stocks too


Mark Hulbert, founder of Hulbert Financial Digest, tracks more than 160 financial newsletters; and one of them involves Argus Research, which shows insiders selling at a ratio not seen since last summer’s sell-off. Should this be a cautionary note for auto sector stocks, too?

Insider selling is not a respecter or persons. When it hits the general market, it can transcend a specific sector and extend to other sectors with its negative effects. So, the follow-up question here is: Will insider selling this time around, which hints at a general market sell-off, drive auto sector stocks down, despite the strength and all the gains achieved in the past year? And how far might they fall?

Mark Hulbert, founder of Hulbert Financial Digest in Annandale, Va., has been tracking the advice of more than 160 financial newsletters since 1980. So, his access to information is much greater than the general public. In this he looks for trends and repeatability based on probability.

As a trader, I have great respect for Mr. Hulbert’s work. So, it should be no surprise that I might view this documented sell-off warning as a precursor, applicable to more than just the general market; more specifically to auto stocks. Point is, regardless of who is doing the selling, if it’s big enough, then all sectors can be affected.

Hulbert’s latest article for MarketWatch.com says corporate insiders are now selling their companies’ stock at a rate not seen since late last July. Why is this a concern? A late July, 2011 spike in selling came just days before a very painful two-week period. I remember it well. In fact, it was rated as severe by many.

Be apprised that watching corporate insiders is considered an important element of any robust analysis of fundamental-related stock news. The theory says that when corporate insiders, as in officers, directors and largest shareholders, buy or sell, it is based on the assumption that they know more about their firms’ prospects than do the rest of us. So, it is deemed bad news whenever they sell at such a heavy pace.

Technical analysts who follow price dynamics, assume the fundamentals are already baked in to the prices. So, question is, is this latest insider-selling information fully baked in to prices? Probably not, if the volume is high, which is why Hulbert is writing about it.

Moreover, when data such as insider selling is confirmed by a higher than average ratio of the number of shares sold in the open market compared to the number bought, that becomes alarming. Such seems to be the case with the latest ratio calculated by Argus Research and reported via their service, the Vickers Weekly Insider Report. According to Hulbert‘s article, this sell-to-buy ratio stood at 5.77-to-1. And among insiders at companies listed on the New York Stock Exchange, this ratio was even greater at 8.2-to-1.

Now, should you panic and look to sell shares, and stay in cash based on this information? That’s your choice, but know there is more than one way to handle a potential downturn; and panic should not be one of them. One way is to indeed go to cash. The other is to hedge your positions with put options. Think of put options in this case as you do insurance.

Another method is to sell upside call options for income on the stock you do own. However, that is more often a strategy for a sideways market, not a downturn.

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