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Corporate insiders losing enthusiasm for stocks

To the discomfiture of many Wall Street analysts, corporate insiders have lately lost a lot of their enthusiasm for stocks.

Indexes that track buying and selling of shares by this key group of investors stand at some of their lowest levels of recent years. And although insiders' past performance as market-timers has been spotty at times, their increased caution is widely viewed as a significant new question mark overhanging the market outlook."Insider sentiment is bearish," observes Claude Amadeo at the investment firm of Bridgewater Associates in Wilton, Conn. "While there is not enough history here to make any causality or leading-indication judgments, it is possible that the current fall in insider sentiment is foretelling equity market weakness."

The Insiders, a Deerfield Beach, Fla., newsletter, says its "insider indicator" currently stands at 29 percent, about as low as it has fallen at any time in the 1990s.

This number measures the amount of open-market purchases, as a percentage of all purchases and sales, by corporate insiders - defined as top executives, directors and large shareholders - in their own companies' stock.

Observes Amadeo, "Corporate insiders arguably have information that is not available anywhere else and the most accurate sense of where their corporations' profits are headed."

Insiders often acquire stock through other channels, such as stock option plans. So The Insiders deems it bullish when 50 percent or more of open-market insider activity, which must be publicly disclosed, is on the buy side. From 30 percent to 50 percent is considered a neutral range, and below 30 percent a negative sign.

For most of the past six years, The Insiders' index has fluctuated in the neutral range, with occasional forays into bullish territory. But since early summer it has dropped steadily from above the top of the neutral range to just below the bottom of it.

"America's most knowledgeable investors are now in a selling mood," says Norman Fosback, The Insiders' editor.

This might be even more ominous than it sounds if past swings in insider sentiment had proved to be consistently accurate portents of the ups and downs of the market. But it hasn't always worked out that way.

Throughout the first three quarters of 1987, for instance, The Insiders' indicator stayed neutral, giving no warning at all of the crash that drove the Dow Jones industrial average down 36 percent in less than two months' time from late August through Oct. 19 of that year.

Although they missed that call, insiders made up for lost time by turning into aggressive buyers after the crash, correctly signaling a buying opportunity for stocks. When the 1990 bear market also reduced stock prices to bargain levels, insiders went on another buying spree.

By The Insiders' reckoning, corporate insiders haven't spent any sustained periods on the bearish end of the spectrum since the early and mid-1980s - and thus have managed to reap many of the benefits of one of the great bull markets in financial history.

But as the mighty market advance was getting started, the insiders were slow to catch on. The Insiders' indicator was solidly bearish for a full year from late 1982 to late 1983, and further bouts of selling occurred in late 1984 and early 1985.

Since insiders weren't so good at anticipating some of the bull market's early moves, perhaps they also aren't especially discerning now, at least in their timing.

Nevertheless, says Fosback, when only about a quarter of insiders' open-market trades in the stocks they follow so closely represent buy orders, "this is not good news."