When Insiders Sell

The insiders are selling, but should you join them? As our panel of industry observers analyze recent insider sales, they've drawn the conclusion that many insiders might be selling more because they have to, rather than because they want to. Meaning that, while insider sales are typically a useful way to measure the future of a firm--i.e., sell when they sell--the current harried climate is the exception to that rule.

First the evidence: As reported by Bloomberg, insider selling has jumped to its highest level since 2007 as directors and senior officers at U.S. firms sold $353 million in equities in April, or 8.3 times more than they bought. Obviously, this is a huge imbalance, and one that would traditionally signal that during this most recent market rally, with the S&P 500 up 31.5% since March 9, selling would be the smart move. But these are not traditional times.

AllianceBernstein Holding ( AB - news - people ) had the most insider selling over the past three months, with $1.2 billion being unloaded. In that same time, the firm's stock has remained buoyant, up 14.7%. CSX ( CSX - news - people ) had the second most insider sales, as they unloaded $513.5 million in that time. Its shares are up 1% in that time. Third is Quest Diagnostics ( DGX - news - people ), which saw insiders unload $256.1 million. Its shares are down 1% in the same time. As you can see, the pattern here is that there is no real pattern, at least regarding share performance against insider selling.

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Vince Farrell, chief investment officer at Soleil Securities, says that its foolish to assume that insiders are bailing on stocks because they believe they've topped out. "I think a lot of corporate biggies are guilty of the same thing as the subprime borrowers--too much debt," he says.

Farrell pointed to the example of Aubrey McClendon, the founder and chief executive of natural gas firm Chesapeake Energy ( CHK - news - people ). Though already a multi-billionaire in August 2008, McClendon took on major leverage in order to buy more of his firm's stock, eventually owning more than 32 million shares. But by Oct. 10, 2008 the vast majority of his shares had been sold, as McClendon fell victim to a margin call.

Farrell believes a similar dynamic could be at work now, which is why he cautions against reading too much into insider moves currently being made. "Normally, heavy insider selling can be used as a tool in evaluating stock," he says. "I would be cautious about that now. Everyone is hurting."

John Osbon, the head of Osbon Capital Management, also believes that many insiders are selling in order to de-leverage, as opposed to thinking the market's rise could be kaput. He also notes that insiders have relatively few opportunities to sell, due to illiquidity, lockups and to taxes.