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Ignore reports of insider selling

By Sheyna Steiner · Bankrate.com
Wednesday, February 27, 2013
Posted: 12 pm ET

As the Dow hit 14,000, billionaires dumped U.S. stocks in droves, and insiders were bailing out at record numbers. What gives?

Just last Thursday, Feb. 21, Bloomberg reported that corporate executives were taking advantage of high stock prices by selling shares of their companies.

From the Bloomberg story, "Insider sales reach 2-year high as S&P 500 nears record":

The ratio of sales versus purchases by chief executives, directors and senior officers at (Standard & Poor's) 500 companies is more than twice the average ratio of 5.4 over the past 10 years, according to data compiled by Bloomberg and Pavilion. In the months after the ratio was last at this level, the benchmark index retreated as much as 19 percent from April to October of 2011.

Is there something they know?

It may not bolster confidence in their companies when insiders are selling stocks faster than McDonald's sells cheeseburgers, but the simplest explanations are often the right ones.

"Sometimes a lock-up period has expired -- as happened with Facebook stock last year -- that leads to increased selling," says CFP professional Peter Donohoe, a wealth management specialist with PRW Wealth Management in Quincy, Mass.

Most of the time, insiders have no special line on what's going to happen in the economy or in the stock market.

"They react to fear and greed and are just as uncertain as to what is going to happen in the future," says Scott Wren, senior equity strategist with Wells Fargo Advisors.

"Most of it is, 'Gee, the stock market has moved up a lot, our stock has moved up a lot. I want to lock in some gains here,'" he says. "If you have a lot of stock options and can take a meaningful amount off the table and have a lot left, there's no reason to not take some profits and declare victory -- on that portion at least."

With the S&P 500 up about 6 percent year-to-date, many people do think there may be a short-term correction coming in the first half of the year -- including Donohoe.

"While I feel a correction is possible in the first or second quarter, for a longer-term time horizon, I am cautiously optimistic about the prospects for the equity markets," he says.

That's good because retail investors have been warming up to stock mutual funds since the beginning of the year, according to the Investment Company Institute, the trade association for the mutual fund industry. Domestic equity funds posted positive inflows in January and through the first two weeks of February, the latest data reported. They were negative every month in 2012.

With the U.S. budget issues and slowing gross domestic product around the globe, there are already a lot of  mixed messages regarding the stock market that may spook individual investors. How and when insiders sell is ultimately more noise than most people need.

"It might be something to maybe keep in the back of my head, but it's not anything I would use when I'm trying to come up with a strategy and talk to our portfolio managers," Wren says.

"Some individuals might look at it as one more reason for them to be panicked and add it to the list of reasons they shouldn't own stocks -- retail investors are really good at that," he says.

Have you ever waited too long to get back into the stock market?

Follow me on Twitter: @SheynaSteiner.

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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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