Insiders are selling. Should you?

@lamonicabuzzApril 24, 2012: 12:44 PM ET
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NEW YORK (CNNMoney) -- First quarter earnings have been decent, if not spectacular. And many corporate executives are issuing cautiously optimistic guidance for the rest of the year.

But while insiders' lips are saying one thing, their wallets are saying another. The level of insider selling among S&P 500 (SPX) companies is the highest in nearly 10 years. That is not good.

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Sure, executives have many reasons for selling their stock. They may have automatic plans to sell shares every now and then, regardless of the stock price. They may be selling for diversification purposes.

They may also need the cash for a variety of personal reasons, like sending their kids to college, buying a house or getting a divorce. (To pull a line from Us Weekly about celebrities, CEOs are just like us!)

Still, the sheer volume of insider sales (nearly 1,800 by S&P 500 executives over a three-month period according to data crunched by Montreal-based brokerage Brockhouse Cooper) is alarming.

You can't help but cynically wonder if insiders decided to take money off the table after a first quarter in which stocks had a mid-to-late 1990s "irrationally exuberant" surge.

"Corporate managers are not buying the current rally. If the people who know their companies best are selling, maybe you should reconsider whether to buy," said Pierre Lapointe, global macro strategist with Brockhouse Cooper. He added that the current level of insider selling could signal as much as a 10% decline in stocks over the next few months.

It is telling that many of the companies with a significant level of insider sales during the past few months have been among the hottest stocks so far in 2012. Insider selling activity has been high over the past three months at Salesforce.com (CRM), Whole Foods Market (WFM), Priceline (PCLN) and Fossil (FOSL), for example.

What's more, several insiders at companies that recently disappointed investors with their latest quarterly earnings and/or outlooks have also been selling more than buying, including Big Lots (BIG, Fortune 500), Mattel (MAT, Fortune 500) and Kellogg (K, Fortune 500).

Lapointe said the increase in insider selling is even more dramatic considering that this didn't happen a year ago, when stocks rose in the first part of the year and then sank during the spring on global economic concerns. Sound familiar?

"Last year, there were fears of a double-dip recession that turned out to be unfounded," Lapointe said. "But this year, there are more economic headwinds. Executives may be worried about where consumer demand is going to come from over the next few months."

In fact, insiders were doing the exact opposite a year ago. Buying spiked last summer to its highest level since late 2008 and 2009 -- a time when many stocks were trading at unusually low valuations as investors panicked following the bankruptcy of Lehman Brothers and resulting credit crisis.

Many savvy corporate executives realized during the worst of the Great Recession that they could scoop up shares of their companies at once-in-a-lifetime prices. The S&P 500 has more than doubled in the past three years, showing that insiders were right.

"Insiders are usually spot on with calls on their companies and the economy. In 2009, everybody was scared and that's when insiders were buying," said David James, manager with James Investment Research, a money manager in Alpha, Ohio.

You could argue that insiders also correctly anticipated the big move up in stocks over the past few months. The S&P 500 hit its lowest point of 2011 in early October and is up nearly 30% since then -- even with this month's pullback.

Hopefully, insiders did not correctly call a top for the current bull market. But there's definitely reason to be nervous

"The fact that we are now seeing so much selling is a worrisome sign." said James.

Best of StockTwits: Investors haven't added Netflix (NFLX) to their queue of stocks to buy following its disappointing sales outlook. Some traders are assuming the worst.

bradloncar: I'm trying to think of a scenario where I would sign up for a $NFLX subscription again, and can't. Obviously not the only one.

RickPalmer907: $NFLX became obsolete when they tried dishing junk to watch and thinking I'll pay for it - RedBox is the winner clearly with current titles.

DarvasTrader: What? You mean fewer movies and higher prices caused subscribers to leave? $NFLX

Netflix clearly is getting squeezed by competition. As I pointed out in today's Buzz video, Netflix is not the only streaming game in town. And many consumers may even still prefer the old-fashioned DVD from Coinstar's (CSTR) Redbox, which wins raves from customers for both price and availability of new releases.

I don't think Netflix is dead by any means. But the reaction to the sales guidance shows that this is a company still in an awkward transition phase... and it was seriously overbought heading into earnings. I said as much Friday.

Perhaps there will be a massive rush of new subscribers (not to mention Bob Loblaw blog readers) the closer we get to the fourth season of "Arrested Development" in 2013?

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

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