On October 31st we noticed a significant jump in the ratio of companies in the FTSE 350 index exhibiting share purchases by directors.

Companies in the index which exhibited net Purchases by directors (cumulative gbp50k+ in the month) vs Sales had moved from evens to as high as 10:1.  (See October 31st post: Directors ARE buying shares- Buys outnumber Sells 10:1).

Since October 31st the FTSE 350 index is up 21.5%.

Companies featuring on the followthedirectors ‘STRONG’ signal list as at October 30 2008 have outperformed their relevant stock market indices by over 10% over the period.

Over the subsequent months, the ratio of directors buys versus sells has dropped as follows:

Month            ratio of Buys to Sells in FTSE 350 index

October:               10 : 1

November       2.75: 1

December           1.3: 1

January              1.15: 1

March                  1.0: 1

April                    0.56:1

I’m not too surprised by the falls in directors share purchases,  but the latest data point showing Sells outnumbering Buys by almost 2:1 sends a clear signal, and a bit of a shiver up the spine: Directors think shares are expensive.

If we analyse directors dealings by market segment, then we find that in the FTSE 100 stocks, sells in April outnumber buys by 12:8. yet in the FTSE Small Cap index, directors appear still to be buying, with buys outnumbering sells by 5:1. This ratio hasn’t changed since October, when the ratio was similar. It jumped to 7:1 in November.

The last time we saw Buys below Sells was for the month of June 2007, when the ratio dropped from evens in May to 0.8 in June. Wasn’t that the month the stock market peaked?

We all love to see a stock market recovering, but I personally am taking some money out, and looking for signals when directors start buying again.

‘Sell in May and Go Away’? Read John Mauldins thoughts on http://www.frontlinethoughts.com/index.asp. He analyses May to October share market performance in secular bear markets. Not a pretty picture.

See also The Pragmatic Capitalist: ‘Insider Buying non existent’ [good chart here].

Forbes suggest in ‘When Insiders Sell‘ that we shouldn’t worry too much about the spike in Insider selling, that it could be down to Directors being ‘too leveraged’. [hat tip to FT Alphaville]

For our previous views on the Market, please click on the ‘Market Musings’ tab to the left of this post, or here. This is where you will find the following posts:

April 2nd: Non execs make better investors- by far.

February 4th: Directors buying interest falls away in a sideways market.

December 16th: Directors buying waned in November

October 31st: Directors ARE buying shares- Buys outnumber Sells 10:1

Source: The excellent website ‘www.Digitallook.com‘ is the source of information for the Directors Dealings Buy/Sell ratios given above.

See also Ockham Research : “Insiders are selling into the rally” (April 24th)

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