In March 2024, a significant trend emerged as notable corporate insiders like Jeff Bezos, Mark Zuckerberg, and Peter Thiel strategically sold substantial amounts of their stock holdings. This occurred just before a meaningful downturn that saw the stock market lose approximately 6% of its value, wiping out around $2 trillion in market capitalization within weeks. Despite the pullback, the bullish structure of the S&P 500 index was still maintained. This article explores the context and implications of the insider sales, examining how insider behaviors can serve as a barometer for upcoming market shifts, and anticipates the next market move.
Historical Context of Insider Selling
Corporate insiders have often been able to time their stock transactions with an uncanny precision that typically precedes major market shifts. This pattern is not new, for instance, the heavy insider selling observed in 1999 and 2021 foreshadowed significant market drops of 25% and 50% respectively. In early 2024, our analysis highlighted an unusual spike in insider selling, indicating a that the market was nearing a correction. These insights were crucial for our members, suggesting a cautious approach to what appeared to be an overheated market.
Reasons Behind Insider Selling
Insiders may sell shares for various reasons, sometimes unrelated to their forecasts of stock market downturns. These include personal financial planning, diversification of assets, and sometimes regulatory or contractual obligations. However, in scenarios like March 2024, the alignment of insider selling with other market indicators suggests a more calculated decision based on expected market dynamics. 3 key reasons why insiders typically sell are:
- Valuation Concerns: Often, insiders sell their holdings if they believe their company’s market valuation exceeds its intrinsic value based on future earnings potential.
- Anticipating Corporate Performance: Insider access to forthcoming quarterly performance data and other business-related developments can prompt selling if the projections are not favorable.
- Market Sentiment: At times, insiders might assess the overall market sentiment as overly optimistic, choosing to sell before a corrective downturn materializes.
Overheated S&P 500 Index Was Due for a Correction
Prior to the downturn, the S&P 500 exhibited signs of overextension, having gone 154 days without touching its 50-day moving average – an unusually long streak by historical standards. This was a clear signal that the market might be due for a correction, a hypothesis supported by the eventual market behavior.
Rising Interest Rates and Their Impacts
Another critical factor was the swift rise in yields, with the 2-year yield escalating from around 4% in January to 4.7% by March. This increase reversed the lower interest rate environment that had previously fueled a substantial rally from October 2023 to January 2024. The divergence between market pricing and interest rate expectations was stark, further indicating potential market stress. Eventually, market participants priced in the rise in yields as the S&P 500 index saw a 6% correction.
Divergence in Market Breadth
The breadth of the market, or the number of stocks trending above their 50-day moving averages, also showed us a major warning signal. While 90% of stocks were above their 50-day moving average in late 2023, by March 2024, this had decreased to about 75%. However, during this period, the market continued to make new highs. This divergence between market breadth and the S&P 500 index was another indicator suggesting a weakening in the ongoing rally and the potential of a pullback.
Job Market as a Predictor of the S&P 500 Index
The job market is a crucial economic indicator for the economy, often correlating directly with stock market trends. Despite the weakening in the US economy in 2022/2023, initial jobless claims continued to trend lower, suggesting that the economy was not heading towards a significant downturn yet. Historically, major bear markets on the S&P 500 index have often coincided with rising jobless claims, such as during the financial crisis of 2008 and the economic slowdowns in the early 2000s and 1990s.
However, with jobless claims still low today, we anticipate the current market correction to be shallow. The S&P 500 index is likely heading to new highs until a significant rise in jobless claims triggers a deeper correction. Currently, the S&P 500 index still shows a very bullish technical structure. It recently retested a key support level after breaking out its rising channe. We’re gradually increasing equity exposure as this support level continues to hold.
Conclusion
The insider selling observed in March 2024 serves as a potent reminder of the multi-dimensional nature of market analysis. For investors, understanding the interplay between insider activities, market indicators, and economic fundamentals is crucial for navigating the complexities of the stock market. While insider selling can provide valuable clues, it is essential to consider this data in conjunction with a broader set of indicators to form a well-rounded investment strategy. Insiders were accurate in timing their correction prior to the recent 6% market correction. However, the S&P 500 index market structure is still bullish. Unless the labor market begins weakening with a rise in jobless claims, a next leg up in the S&P 500 index is looking very likely. Click here to get a 7-day free trial! Subscribe to our YouTube channel and Follow us on X for more updates!
