The Smart Money Says Sell

Stock sales by finance insiders may foretell tighter credit

Executives in financial services are selling off shares aggressively--and that could bode ill for the broader credit market.

Insider selling isn't an inherently bearish signal. Plenty of executives sell company shares in regular patterns or for financial planning purposes--to pay college bills, say.

But the widespread selling now taking place in the financial industry is noteworthy, says Michael P. Painchaud, managing director at Market Profile Theorems Inc., a Seattle quantitative research shop. He recently crunched the numbers on 1,120 such companies, from investment banks to specialty-finance outfits. What emerged was a clear pattern of bearishness in the corner suite, especially at firms sensitive to consumer credit. "There is an inordinate amount of risk within the finance industry relative to last summer," he says. "The big picture is one of erosion [of confidence] relative to other industries."

Painchaud found that in the financial industry, the ratio of open-market sales to purchases by insiders is 5.18, vs. the historical average of 2.1. His model, which compares insider selling in June, 2006, with January, 2007, takes into account, among other things, the number of individuals selling or buying in the past 60 days and heavy options-related sales. What follows are companies for which a "deterioration in the outlook is most clear." BusinessWeek translated Painchaud's numerical scale into categories: "most bearish," "highly bearish," and "bearish."

By Mara Der Hovanesian

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