BCA Research warns that insider selling is growing, particularly in the financials. This trend suggests that U.S. equities may soon be struggling.

BCA reports that insiders’ net selling has increased sharply in recent weeks as stock prices have risen, “possibly indicating that good news on the profit front will soon peak”.

“Given insiders’ ostensibly superior knowledge of their company’s profit outlook, [their trading] can be a useful market-timing tool,” it says in a research note. “The massive increase in insider selling in the past quarter is a bearish signal. It hints that insiders may expect earnings growth to slow in the near future and want to reduce exposure in advance.”

BCA says that this is consistent with its profit forecast for S&P 500 earnings, which points to much slower growth in the year ahead. “Mounting insider selling is a warning that the U.S. equity rally faces increasing headwinds,” it concludes.

Drilling down to the sector level, BCA reports that tech insiders have not been selling to any alarming degree during the latest advance in their shares. “However, financial insiders are on the opposite track. Sellers remain aggressive and buying has virtually evaporated,” it says. “The insider sell/buy ratio has soared, and does not validate recent firmness in relative stock performance.”

“While it is true that financial insiders remained heavy sellers until well after relative stock performance troughed in 2000, this seemingly lagging behavior likely reflects two key events. First, there was a fear that the Fed would not act to protect growth, as interest rates were only first slashed in early-2001, even though the broad corporate sector was on the verge of its worst ever post-war crunch. Second, the collapse in tech stock prices lifted all non-tech groups,” it explains. “Now, Fed Chairman Greenspan remains intent on pushing short-term rates higher, and financial insiders are paying heed.”

“The bottom line is that the downside risks to financial sector relative share performance remain high and underweight positions are still recommended (with the exception of the insurance group, which was upgraded to neutral),” it adds.