Baby, it's cold inside

There's a ridiculous yet tempting notion infecting investors right now: It's the idea that many stocks are so cheap that they have got to be worth buying. Cisco Systems and Sun Microsystems have fallen below US$20, Oracle $15, Ariba .$10 ... the list goes on. But in a market defined by its lack of buyers, an alarming phenomenon suggests things will get even worse.

Company insiders aren't buying stock. Worse still, they're selling, despite the depressed prices their shares now fetch. One would think that if anyone could recognize a bargain, the directors and corporate executives would. After all, if anyone drank the Kool-Aid, they did.

But figures released last week show that the pace at which executives buy their own stock fell to a five-year low in February, worse than January's record low, hinting that the market has further to fall. The sold-bought ratio - a figure kept by InsiderScores.com - compares insider buying to insider selling, and that ratio has never looked lousier. Insiders are always selling more than they're buying (and, therefore, the ratio has never been negative), but in February the ratio hit 29.07, a record high.

Historically, a spike in this ratio has proved a warning of an impending market decline. In May 1996, the sold-bought ratio jumped to 13.7 and in July of that year the S&P 500 index dropped 4.5 percent. In a rising market in July 1998, the ratio hit 20.3; the following month the S&P 500 fell 14.6 percent. "We've found that the sold-bought ratio is a leading indicator of where the market is going," says Lon Gerber, InsiderScores.com's director of research. "There's a two- or three-month lag, so clearly the rise in February doesn't suggest good things for the market."

This is, of course, the last thing market watchers want to hear. "I think people are frightened, insiders included," says Wall Street veteran Jon Burnham, chairman of Burnham Investment Trust and manager of the $176 million Burnham Fund. "This tells you the insiders don't think their stocks are particularly attractive, and they don't think this thing is over."

What has characterized the rise in the sold-bought ratio is emblematic of the larger stock market: It is not so much a cabal of sellers as a lack of buyers. For the last six months, insiders have sold between $3.2 billion and $4.3 billion in stock each month. But inside buyers have simply disappeared. In February, insiders accumulated $144.4 million in stock, less than half December's figure of $313 million. But they sold $4.2 billion in stock.

Some of the data suggests that corporate insiders have been burned as badly as everyone else buying stock in recent years. The record for insider buying was set in February 2000, when the market was at an all-time high. Insiders bought $480.1 million worth. But that same month, they dumped $10.9 billion in shares. The sold-bought ratio, therefore, hit 22.6, then a historic peak. The market, of course, fell apart shortly after.

"You hear nothing good in the news," says Burnham. "And corporate executives are hearing the same. The market is not going to stabilize unless something good happens."

An old saying on Wall Street goes, "There are many reasons insiders sell, but there's only one reason they buy: They think the stock is going up." Last week's numbers make it painfully clear insiders aren't feeling bullish.

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