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Insider Action Is Wall Street’s Trojan Horse

Keep an eye on insider sales


So you thought you were safe within your fortified city?  Think again!  All year long, while mom-and-pop investors have eagerly lapped up U.S. stocks, somebody has been selling.  (For every buyer, there has to be a person on the other side of the transaction.)  And that “somebody” has recently gone on a spectacular selling spree.

I’m talking about the corporate insiders—officers and directors of America’s publicly traded companies.  As an investor, you generally think of these folks as being “on your side.”

When it comes to dealing in their own company’s stock, however, the insiders tend to be as crafty as those legendary Greek stowaways who rolled unnoticed into the streets of Troy—and conquered the town.  To an uncanny degree, insiders manage to buy their companies’ stock near important lows and to unload it near significant highs.

It’s perfectly legal, too, as long as the insiders report their trades to the SEC and don’t buy or sell immediately ahead of a major corporate event.  You can track the insiders’ moves, if you care enough, through any number of public sources.  But most investors don’t bother.

More’s the pity, because the insiders, as a group, are making a powerful statement right now.  Over the past eight weeks, according to Vickers (the oldest and most respected record keeper in the field), insiders in the aggregate have executed just over six sell transactions for every buy.

That’s more than double the historical norm.  It’s also nearly identical to the ratio we saw in the run-up to the market’s May 2013 peak.

Heavy insider selling doesn’t necessarily mean the blue chip stock indexes will fall out of bed tomorrow.  However, it’s a warning (along with the lofty valuations I’ve discussed previously) that another market pullback, perhaps on the order of 5%-10%, is coming soon.  At this late stage of the market cycle, it’s wise to take every such admonition seriously.

How should you prepare?  Steal a cue from the insiders and focus your energies more on selling than buying in here.  For our model portfolio, I now recommend selling Emerson Electric (EMR).

Since our initial purchase in May 2012, this old-line industrial outfit has racked up a sizzling 51% total return, including reinvested dividends.  That’s great, but most of the appreciation in the stock traces back to a sharp increase in the P/E multiple.  Earnings have barely grown over the past 18 months.

As a result, EMR is trading at essentially the same multiple it fetched (whether on forward or trailing earnings) at the major market top in 2007.  Take your profit, and let the value-blind momentum players gamble on the stock from here on.

On the buy side, the Wells Fargo Series O Preferred Shares that I recommended in my November issue finally touched our limit price.  Accordingly, in the model portfolio, we’re creating a 2.5% position for the stock, deducting the same amount from Intermediate-Term Credit Bonds.

Keep accumulating the Wells Series O at or below our limit.  Current yield:  6.2%.

No buy signal yet for the State Street Series C Preferred. Be patient and enter a limit order with your broker.  Either our price will be touched, or we’ll find another preferred at a more attractive yield.

P.S.  Tesla (NASDAQ: TSLA) short-circuited in late trade today after the electric-car maker reported softer Q3 deliveries than some overeager bulls had counted on.

Article printed from InvestorPlace Media,

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