Main Characters in the Inside Story Thicken the Plot

Corporate insiders have become incredibly uninterested in their own companies’ shares at current prices. Either the executives are fresh out of investable cash, or they figure they’ll have a chance to buy stocks cheaper in the near future.

Either way, the trend suggests that the market is extremely vulnerable to a steep plunge now--especially big-name stocks, where insider disinterest has become chronic.

Stock transactions by insiders--mainly senior executives and directors--are a matter of public record, because they must file notice with the Securities and Exchange Commission when they buy or sell stock in their companies on the open market.

During the past few months, analysts who watch insider trends have warned that the insiders have been buying less and selling more as stock prices have surged. The trend has completely reversed since last fall when, at the depths of the bear market, insiders were buying like crazy.

In theory, insiders should know better than anyone how “cheap” their stocks are at any point because these are the people running the ship. If they’re buying heavily with their own money, you can assume that they see a lot of value in their stocks. And if they’re selling heavily--well, look out below.

Lately, many insiders have turned into raging bears on their own stocks:

* The Insiders newsletter of Ft. Lauderdale, Fla., reports that only 37% of insider transactions have been purchases during the past five weeks, while 63% were sales. The percentage of buyers has fallen sharply as the market has risen. Late last November, when the Dow Jones industrial average was around 2,520, the five-week average percentage of insider purchases was a stunning 76%. Now, with the Dow up 400 points to 2,910, insiders are bailing out.

* Last week alone, only 24% of the insider filings received at the SEC were for stock purchases, while the rest were sales. David Coleman, editor of Vickers Weekly Insider Report newsletter in Washington, says the selling is “higher than I’ve ever seen it, at least since 1987.” Insiders were smart enough to be dumping stock just before the October, 1987, market crash.

* Insiders at New York Stock Exchange-listed companies are much more bearish than their counterparts at smaller, NASDAQ-listed companies. Last week alone, sellers topped buyers 81% to 19% among NYSE company insiders, the Insiders newsletter says. In contrast, for NASDAQ company insiders, the sellers/buyers figures were 74%/26% last week.

During the past five weeks, NASDAQ insiders were 37% buyers, while NYSE insiders were just 28% buyers. Maybe the NYSE company executives sense something about Wall Street’s next move that their peers at smaller firms don’t. Or maybe the smaller firms’ execs figure they’re still picking up relative bargains in their stocks, even at current prices. After all, a hot theme since January has been that small stocks may be in a new long-term bull market, after languishing since 1983.

One factor affecting insider transactions since May 1 has been a change in SEC rules regarding insiders’ stock options--those sweet deals whereby an exec gets the right to buy a load of shares at a set price within a specified time period. It used to be that an insider had to wait six months to sell shares after acquiring them in an option transaction. Now, the SEC allows insiders to exercise options and sell the shares immediately.

Insiders knew the rule change was coming, so many waited until after May 1 to exercise options and sell. But the fact remains that they sold --when they could have held on to the shares. As Coleman simply puts it, “They would not be selling if they thought the shares were undervalued and were likely to appreciate in the near term.” When in doubt, you sell.

Even forgetting the options-influenced selling wave, the absolute number of open-market purchases by insiders tells you that few want to pay current prices for their stocks. In the five-week period ended last Friday, 341 insiders at NYSE companies bought their own shares on the open market--that is, for the same price any other investor would pay (not an option deal). That’s half the 673 that bought in the five weeks ended last Nov. 23.

Do insiders always know when their stocks are bargains and when they’re not? They weren’t terribly prescient early in 1985, when they were throwing stock out the door just before the market soared. But in general, their track record is pretty darn good through the years.

To the average investor, the insiders’ message is clear: Caveat emptor until stocks get cheaper.

Insiders Shun Stocks, JUAN THOMASSIE / Los Angeles Times