Insider Sentiment is Neutral to Bearish in January 2012

Insiders have sharply reduced both their purchases and sales in January 2012.  On the purchase side, insiders reduced their share purchases in their own companies from 161 million shares in December 2011 to 91 million shares in January 2012.  For all of 2011, insiders had averaged out about 163 million share purchases per month.  As for sales, insiders sold about 122 million shares in January 2012, down from 360 million shares in December 2011.  For all of 2011, insiders averaged about 387 million shares sold per month.  

A good indicator of insider sentiment is the buy to total trades ratio.  The historical average value of the insider buys to total trades is around 34%.  Above this level, I consider insider activity to be bullish.  Below this level, I consider insider activity to be bearish. 

In January 2012, insider index has averaged 21%, down from 33% in December 2011, and further down from a reading of 56% in August 2011.  Clearly, since August 2011, insiders are gradually becoming less bullish.  While it is too early to worry about downright pessimism, it appears that insiders are significantly less bullish than they were just six months ago. This is consistent with the interpretation that recent sharp increases in stock prices means that stocks are no longer the bargain they were six months ago. 

 Looking at various market segments, in January 2012, insiders are neutral about small cap stocks, slightly bearish about mid-caps, and somewhat bearish about large caps.  I define small caps to have a maximum market cap of $500 million, mid-cap between $500 million to $5 billion and large-caps greater than $5 billion.  Similarly, insiders are most optimistic about AMEX-listed stocks and least optimistic about NYSE listed stocks.  Given that small-cap stocks have significantly underperformed the large caps in 2011, insiders appear to believe that there is still upside to the small caps.

Looking at industry segments, a few sectors do stand out.  There are only a few areas that insiders are still bullish.  These are small regional banks, small-cap energy and small-cap consumer care companies.  Insiders do not seem to like the interest-rate sensitive stocks.  Insider sentiment in large banks and utility stocks are especially negative. 

Just a few months ago, corporate insiders regarded the sharp declines in stock prices brought about by the European sovereign debt crisis as a window of buying opportunity. This window appears to have closed at this time.   Insider sentiment is neutral to slightly bearish in January 2012.