With Insiders, How Much Is Too Much?
By Paul Elliott
Special to TheStreet.com
Originally posted at 2:42 PM ET 6/13/01 on RealMoney.com
After falling sharply in March and ticking up in April, Form 144 Registrations increased noticeably in May.
Essentially a formal notice of an insider's (or other early investor's) intention to sell restricted stock, Form 144s are filed with the Securities and Exchange Commission no later than the date of the proposed sale.
For this reason, and a variety of others relating to how insider activity is reported, collected and stored, I've long found Form 144 registrations to be a handy measure of insider sentiment, particularly when working at a macro level.
Given the stunning performance of equities in April, an increase in insider selling in May is not altogether surprising. The question, obviously, is how much is too much?
Unlike the bump in April, the $11.2 billion of insider shares that were sold in May was sufficient to reverse the downtrend of the six-month moving average. And while one hates to imbue round numbers with mystical powers, I find the peak above $10 billion a bit disconcerting.
What's it all mean? Well, given a troubling lack of convincing insider buying, I certainly couldn't fault one for citing this in support of a cautious thesis. My instincts, however, tell me that we're still in the ballpark. After all, many smart investors (even some bulls) took profits in May. Look sharp! But while I wouldn't expect another month like April, my hunch is that we are generally still on track.
That being said, there are troubling pockets of insider selling. At the sector level, the insider profile in the chip stocks is particularly disconcerting. Unlike in the general market, where insider selling peaked furiously in February/March 2000, selling in the chip stocks didn't heat up until summer. This was just before the group succumbed in early September 2000. But that's yesterday's news.
What matters now is that in recent months insiders in semiconductors have become much more generous with their stock than those elsewhere in technology and in the market as a whole. Indeed, sales by semiconductor insiders, which bottomed in November, have maintained an upward bias ever since.
In recent weeks, insiders have sold rather generously at National Semiconductor (NSM:NYSE - news - commentary), PMC-Sierra (PMCS:Nasdaq - news - commentary), Advanced Micro Devices (AMD:NYSE - news - commentary) and equipment maker KLA-Tencor (KLAC:Nasdaq - news - commentary).
Elsewhere in technology, the story at Brocade Communications (BRCD:Nasdaq - news - commentary) seems particularly illustrative. Insiders aren't depleting positions, nor are they infrequent sellers.
So what gives? Well, since selling on Jan. 4, Brocade insiders had been quiet as church mice. They didn't even sell during a 100% run-up in April. That they registered more than 1.2 million shares in May tells me one thing: Brocade insiders are not indiscriminant.
As with the semis, supporters of storage stocks are encouraging investors to build up positions ahead of any material improvement in fundamentals. This might prove to have been sound advice; even so, potential takers might want to consider that Brocade insiders have taken the rally as a personal invitation to sell some stock.
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