The market has been on fire lately. The S&P 500 is up more than 6% so far this year and almost 20% off last June’s lows as it approaches record highs.

Inflows into equity mutual funds and exchange-traded funds for January totaled $34.2 billion, the highest since January 1996. This may mean that individual investors have finally returned to the market en masse and are ready to push stocks higher.

But as everyone else is buying, should you be buying too?#-ad_banner-#

Investors with the most intimate insight into the near-term value of corporate America apparently don’t think so. In fact, the last time they were selling this much was in July 2011, just before the debt-ceiling crisis sent stocks down 17% in less than a month. And as we all probably know by now, Congress is working to address the next stage of the “Fiscal Cliff” crisis with a proposed $85 billion in “sequestration” budget cuts.

The U.S. Congressional Budget Office is estimating the so-called sequesters could cost as many as 1 million jobs and send the United States into another recession. Politicians and pundits have already placed fear into consumers, which means next month’s consumer confidence numbers could likely plunge. Many companies have already sent out conditional layoff and furlough notices in a signal that production will be cut to meet weakening demand.

Diversification or a deeper reason?
Confronted with this looming scenario, company insiders have sold 12 stocks for each stock they bought in the past three months. Executives at almost one-third (30.6%) of the S&P 500 companies have sold shares between Feb. 11-15, with sales outnumbering purchases by 17-1, meaning the pressure to sell may be accelerating. When the ratio had been this high in the past, it was followed by an average drop of almost 6% in the overall market.

Keep in mind that there are reasons for insider selling that do not necessarily signal a tumble in corporate profits. With big paydays in stock options and gifts, many insiders need to sell regularly to diversify their wealth. Surely some of the increased selling last December was ahead of the new tax law changes that have hit the mega-rich.

But that alone doesn’t explain the near-record level of selling we are seeing now.

Of the companies that have reported performance for the fourth quarter of 2012, earnings have only come in 3.4% above expectations, which is lower than the 4.2% average seen in the last four quarters.

To make matters worse, 76% of the 95 companies issuing guidance have reported negative earnings guidance, while only 24% have issued positive forecasts for the first quarter of 2013. Analysts have reduced their estimates for earnings growth in all 10 sectors to -0.2% in the first quarter.

As if that were not enough, the recent Italian elections have brought Europe back into the mix, while a private survey of Chinese manufacturers has shown the slowest growth in four months.

The insider exodus is even happening at some of the largest U.S. companies. Here are three stocks with recent, heavy insider trading.

1. Google

While the rest of the market is touting Google (Nasdaq: GOOG) to reach $1,000 a share, the insiders are cashing in. Insiders at Google have sold 2.55 million shares in the past six months in 110 transactions. Selling was widespread over nine insiders, including the CEO, co-founder and the chairman of the board. The shares are reaching new 52-week highs and the trailing price-to-earnings (P/E) ratio of almost 25 is at its highest in three years. One of the largest sellers was Chairman Eric Schmidt, who announced plans to sell as many as 3.2 million shares, and may unload as much as 42% of his holdings in the company. Growth in mobile advertisement revenue reduced paid click growth to just 24% in the fourth quarter of 2012 from 33% in the previous quarter, making it the weakest rate since the second quarter of 2011. The shift from desktop computers to mobile and tablet computers has also resulted in a 6% decline in cost-per-click advertisement revenue from the previous year. This is the fifth sequential quarter the company has experienced a decline in revenue from cost-per-click advertisements. Google has yet to make its Motorola venture profitable. The deal still brought an earnings loss of $152 million before interest and taxes in the fourth quarter of 2012. The $12.5 billion buyout of the smartphone giant in 2011 has weakened Google’s margins and balance sheet and it is still uncertain how it will utilize the asset.

2. Visa

The president, executive chairman, CEO and seven other directors at credit card processor Visa (NYSE: V) have sold 1.1 million shares in 20 transactions during the past six months. The shares are just 2% below their 52-week high and the P/E ratio of 44 is well above the industry average of 30. Gross revenue of $3.4 billion was just under consensus estimates during 2013’s first fiscal quarter, largely as a result of slower-than-expected growth in international transaction fees. As legislation behind the Dodd-Frank Act becomes clearer, Visa could see its authorization and settlement fees decline, which could significantly hit revenue projections.

3. Texas Instruments

Insiders at Texas Instruments (Nasdaq: TXN) have sold 1.1 million shares in the past six months. Nine insiders, including senior vice presidents with detailed knowledge of the company’s operations, have sold major stakes in the firm. The stock is enjoying new 52-week highs, while the rest of the semiconductor industry continues struggling with slowing PC sales. The P/E ratio of almost 23 is well above the average of 17 times trailing earnings for the industry. Revenue fell by 6.6% to $12.8 billion and earnings were down almost 20% to $1.51 a share last year and are expected to be flat at best this year. Revenue for the first quarter is expected to be down $179 million sequentially, largely as a result of the company’s exit from wireless products for the smartphone and consumer tablet markets. Weakness in the PC market could lead to another sales decline of 8% this year, before rebounding in 2014, according to data by Standard & Poor’s.

Risks to Consider: The high inflows of retail investors returning to the market might support stock prices for a while and this heavy selling activity now may miss out on some upside gain. Still, retail investors cannot support weakening fundamentals and lack of buying by insiders for long.

Action to Take –> With the run in stock prices during the past few years, it might be time to reevaluate the fundamental strength of stocks in your portfolio. Are the people managing the company as positive as most investors today? By the recent heavy insider-selling activity, the answer is a resounding “No.” If you own any stocks that appear too overvalued, then it may be time to follow the smart money and book profits.