Screaming Sell Signals From Wall Street

Hear those screams coming from your local movie theater? It might be teenagers getting the "bejeebers" scared out of them by the current horror flick, House of Wax (search).

Or it might be their parents reacting to the news of stock sales by corporate insiders. Horrors either way.

It's not your imagination: The number of horror films from the major studios is up big time. At the same time, there's been a major jump in the ratio of stocks being sold vs. bought by CEOs, CFOs, directors and holders of more than 10 percent of a company's stock. News of this sort can combine to put a real scare in the populace at large because of what these trends suggest for the future of the markets.

Let's look at insider buying first, since it has the more direct connection. A column in the April 17 Wall Street Journal points out, "Countless academic studies — not to mention portfolios — have found that high levels of insider buying are a good indicator of future gains." But what about when corporate insiders sell their stock? On an individual basis, the reason isn't always so clear. Executives often sell not because they think the stock is about to tank, but instead because they need cash to pay college tuition or simply to diversify their portfolio.

However, by aggregating all corporate insider sales vs. all corporate insider buys, we get an overview that tells investors where insiders think the markets are headed. Thomson Financial tracks the insider sales-to-buys ratio for publicly traded companies, and for most of the last decade it's been averaging about 24-to-1. Interestingly, Thomson considers a 20-to-1 ratio at any time to be negative or bearish.

Which begs the question: What's the ratio now? Get ready to gasp. In March, the ratio spiked, with sales outnumbering purchases by 60-to-1. You might even be able to hear the insiders screaming, "Get us outta here!" Conventional wisdom suggests that insider buys are more telling than insider sales. But spikes in this sales-to-buys ratio actually predict a market downturn generally occurring about one year later. For instance, the last time the ratio spiked was in March 2004, followed by a declining stock market starting this year in March.

Now let's look at the eerie jump in the horror movie genre. A May 1 Reuters story points out that major film studios are releasing 12 scary movies this summer, "roughly double last year's and far above any season in recent years."

Did you know that the original classic horror movies — Frankenstein, Dracula, Dr. Jekyll and Mr. Hyde, The Mummy and King Kong — all came out during a three-year period from 1930-33, just when the Dow Jones Industrial Average was collapsing? Similarly, the 1970s saw a large collection of horror films (think Texas Chain Saw Massacre, Carrie, Friday the 13th and Halloween) as the Dow also headed down. The point is, the early '30s and '70s were memorable not just because of the classic horror movies they engendered but also because of the "horrible" performance of the stock market.

Why would horror films surge in 2005? Here's what Rob Zombie, director of the surprise 2003 horror hit The House of 1,000 Corpses, told Reuters: "There is just a silent army of fans. Then, there is something weird about war times or bad times, people see so much real horror that Hollywood horror seems OK."

Not even Star Wars is immune to the extreme violence found in most horror films. A long time ago in a galaxy far, far away at movie theaters galore, the world of Star Wars was kinder and gentler and rated PG when it first opened in 1977.

But in 2005, Time magazine's May 9 review of the latest Star Wars movie, The Revenge of the Sith, gets this headline: "Dark Side Rising."

"It's brooding stuff, the most violent of the series — it's rated PG-13 — about the coming-of-rage of a classic villain," which is film critic Richard Corliss's take on the transformation of Anakin Skywalker into Darth Vader. Or as one online reviewer at the IMDB film web site put it: "George Lucas goes right for the jugular in this film. (The PG-13 rating is well earned! Parents be advised!!)"

So, it looks like if you're a fan of horror flicks, you might be in for a long run of frisson at the movies. And if you're a stock trader or investor, might you be in for a long run of negativity in the markets?

In an April 30 New York Times article, the production president of Warner Brothers who oversees its horror films says, "There's this sense of overriding fear, and what's going on in the marketplace is that people are finding out they've been underserviced in that area."

Substitute the word "markets" for "marketplace" in that quote, and you might get a sense of what the insiders' sales-to-buys ratio is trying to tell us. Still not afraid? Then I'll see you at the opening of Dominion: A Prequel to the Exorcist, due out May 22.

Click here for more information documenting the relationship between horror movies and the stock market.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc.magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. She received her B.A. in Classics from Stanford University.