Symptoms Of A Struggling Economy Linger, Insiders Dropping Stocks

Corporate insiders are unloading their stocks and in a hurry. “They know something we don’t,” could be the understatement of the century, but there could be a perfectly plausible explanation for the sell-offs too.

There isn’t really a surefire and perfect way to tell if the stock market or the economy as a whole is about to crash. The whole system is inherently unpredictable. There are just too many people involved with too many ideas for us to get a good grasp on what could happen based on a few insiders dropping their stocks. But something caused this massive sell off and there are certain players in our economy that have a lot more influence and insider knowledge than the rest of us. So when they make a move in unison, you know there’s a fairly good chance that something is about to happen to the economy.

The people who would stand to lose the most if the markets crashed; the corporate executives and insiders are the ones jumping ship and selling their stocks. The Investment Watch Blog says that the groundswell of insider selling has the attention of Brad Lamensdorf, a portfolio manager at Ranger Alternative Management, and he doesn’t like what he sees. “This is definitely a negative sign,” Lamensdorf wrote in his April newsletter. “They do not see value in their own companies!”

While ordinary investors were optimistically diving into the stock market with both feet after Donald Trump was elected president, the main players were dumping their stocks as far back as February of 2016. Chief executives and other corporate insiders are selling stock hand over fist now that the quarterly earnings season is over, a report from Vickers Weekly Insider shows. Transactions by insiders are restricted around a company’s report. But if it isn’t a lack of value in a company as Lamensdorf suggested, why the sell-off?

It really isn’t clear. It could be a sign of the times, or the large investors know something we all do not. Or it could be a coincidence, although that seems to be the most far-fetched idea. There are few coincidences in economic activities. But Investopedia says that insider selling is not always a foreboding sign of a soon-to-be slower economy. And it doesn’t always mean that there’s no confidence in those companies anymore. The explanation could be as simple as following SEC (Securities and Exchange Commission) rules regarding trading and reporting.

When an insider buys or sells stock on the open market, the law states that the company/insider must make the trade details public. When this data is reported to the SEC, major news wires and/or market data providers will then disseminate it widely to their readership or client base (particularly if the transaction was effectuated by an individual at a well-known company). Furthermore, in many instances the data may also be interpreted and used by journalists in their articles.

Unfortunately, when data is released in this manner it is sometimes wrongly interpreted. In other words, when an insider sells his or her stock, some may interpret the transaction as though he or she no longer stands behind the company, when in fact the transaction may represent only a small portion of the individual’s assets.

Conversely, small insider purchases are sometimes construed as an indicator that the current price offers a terrific buying opportunity, when in fact the insider intends to make purchases in the future at numerous prices.

Since the reports can be misleading, there likely isn’t anything to fear unless we actually see the market take a nosedive, like it did back in 2008. While some signs are there that there could be a drop in the stock market soon, until we have a little more information, it’s probably better to hold off making any big decisions just yet. But, keep in mind, there are symptoms of a struggling economy lingering.