THE BLOG
09/26/2009 05:12 am ET Updated May 25, 2011

Pamplona Bulls Wall Street Bound?

It never fails. Each year at the running of the bulls in Pamplona, someone is gored, and often, someone dies. Just maybe we could be in for more goring in another location which also houses plenty of running bulls, Wall Street.

If you're about to shake your head and say, hey that's unlikely, given a peppier stock market and growing signs that the drought in economic growth is over, don't because the most informed market participants around say that's utter nonsense. And significantly, they're betting big oodles or cash they're right.

I'm referring to those in-the-know corporate insiders, those officers and directors of companies who are constantly privy to an an inside and updated look at precisely what's happening within corporate America, the juiciest kind of information that every investor wishes he could get ahead of the Wall Street herd.

I get this insight into the buying and selling activities of insiders from West Coast liquidity tracker Charles Biderman, the CEO of TrimTabs Investment Research, a Santa Rosa, Ca.-based firm that is partially owned by Goldman Sachs.

A bear who thinks the bullish herd is headed for the slaughterhouse, Biderman, a contrarian, sees the major market averages tumbling back to their March lows--6547 in the Dow Industrials and 676 in the S&P 500. These 2 averages are currently trading at 9543 and 1028 respectively.

To our bear, it's noteworthy that corporate insiders, by the nature of their buying and selling, are making it loud and clear that they don't believe we're over the economic hump despite observations to the contrary from the White House, Ben Bernanke, a slew of economists and many of the country's leading money mangers.

At of now, Biderman points out, corporate insiders are bailing out of equities at a furious pace. So far in August, for example, they have unloaded $5.3 billion worth of their companies' shares (or $410 million a day), the fastest pace of selling since November of 2007, which was one month after the stock market topped out. Meanwhile, insiders, in the same period, have purchased only $160 million worth of their shares (or $10 million a day).

Insiders, of course, are by no means infallible, but what makes their current wave of selling so significant is that when they act en masse, as they are now, they're usually right about 80% of the time, according to some veteran trackers of insider activity.

Taking his argument one step further, Biderman, a former Barron's reporter, says Corporate America's latest investment actions clearly suggest it is scared about the future. Backing up this observation with additional figures, Biderman notes that so far in August, corporate selling of $20.1 billion worth of equities--that's new offerings and net insider selling--has run 6.2 times higher than the $3.3 billion in announced corporate buying (new cash takeovers and new stock buybacks) in the same period. Further, corporate selling has exceeded announced corporate buying for 5 consecutive months. That's the first time such a trend has occurred since July through November of 2003.

TrimTabs further notes that the ratio of insider selling to insider buying this month is a staggering 33.7 to 1 (or the sale of 33.7 shares for each share purchased), the highest level in the four years the research firm has been tracking such data.

"At TrimTabs, we try to pay attention to what companies and corporate insiders do with their own money in the U.S. stock market, not to what the corporate big shots say," Biderman says And right now, the insiders are screaming sell. The significance, as he sees it, "insiders seem to believe the rally will soon fizzle."

They're also saying, he went on, that Wall Street's recent hot streak--5 consecutive winning sessions during which the Dow ballooned nearly 474 points--is little more than a bear market rally in an ongoing bear market.

In contrast, portfolio managers think the insiders are all wet and are scrambling to scoop up what they perceive as bargains before the global economy supposedly recovers. For example, a Bank of America Securities-Merrill Lynch survey of 204 global managers who supervise total assets of $554 billion found that a net 75% of them expect the global economy to strengthen over the next 12 months and are backing up that conviction with big bucks.

Further, a net 34% of the managers are overweight equities this month, the highest percentage since the market top in October of 2007 and double the 7% in July. Another example of the strong bullish sentiment of the big guns is their declining cash positions, currently an average 3.5%, down sharply from July's 4.7%.

In contrast, it's worth noting that those more sophisticated hedge fund investors--liker the insiders--are also taking the recent market rally--a string of 7 consecutive winning sessions in which the Dow jumped 508 points--with a grain of salt. In July, for example, despite some stellar returns, hedge fund redemptions, according to TrimTabs, soared to the tune of $26.2 billion.

What does the public think? It's also wary of the market. Indicative of this, the biggest amount of new investment money from individual investors this month, $30 billion, is going into bond funds, with a good chunk of it coming from puny-yielding money-market funds. That's more than double the $8.3 billion they have expended so far this month for U.S. equity funds.

TrimTabs, which tracks 18 flow and sentiment indicators, has been bearish--and wrong--for more than 2 months. But it has no intention of shifting gears. "We remain partly leveraged bearish (150% short on U.S. equities) because this market is headed south," Biderman believes. "Stock market turning points," he observes, "often happen when the behavior of market participants turns extreme. And we believe we are close to such a point because the actions of corporate insiders and portfolio managers could hardly be more different."

Right now, Wall Street thinks stocks are on the elevator headed to the penthouse. "It's blindsighted," Biderman says. "It's really the B button they hit, the one marked basement."

Write to Dan Dorfman at Dandordan@aol.com