Corporate insider sell/buy ratio just hit an all-time high since 2004.
You’ve probably heard about Warren Buffett and Michael Burry selling U.S. stocks, but they’re not alone.
Corporate insiders, including Mark Zuckerberg who recently sold $14.2 million worth of shares, are joining the selling spree.
Corporate insiders must legally disclose their trades since they have access to inside information about their companies.
When CEOs, CFOs, and COOs buy their company’s stock, it typically signals optimism about future performance.
Their actions are closely watched by retail traders seeking an edge in the market.
But here’s what’s interesting about today’s situation: while the selling-to-buying ratio is at record highs, actual insider selling isn’t particularly elevated.
Previous instances of low insider selling, like late 2018 and early 2016, actually marked market bottoms.
Insider buying, however, is at one of its lowest levels in 15 years.
This could be concerning because it might indicate insiders are cautious or that they view their stocks as overvalued.
The Valuation Picture
About 50% of S&P 500 companies now have PE ratios above 20 – a level most consider expensive.
We’ve only seen this many stocks at such elevated valuations a handful of times since 1998.
Such periods typically preceded valuation corrections.
There is one exception though: In 2020, valuations stayed high for nearly 2 years.
Anyone expecting a correction based solely on valuations missed one of history’s most powerful rallies.
So, today’s high valuations present a risk for investors, but they don’t guarantee a market collapse.
The key question is whether the lack of insider buying signals an imminent decline in valuations.
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Corporate Insider Buying
Historically, elevated insider buying has aligned with stock market bottoms.
But does low insider buying, like we see today, mean it’s time to sell?
Looking at past periods of low insider buying reveals an interesting pattern.
June 2014, October 2016, January 2021, and February 2023 all saw similarly low insider buying, yet none marked significant market peaks.
Even September 2021’s signal came 4 months before the actual 2022 market top.
So the answer is clearly no, you should not necessarily be selling stocks when insiders are not buying, like today.
The current elevated selling-to-buying ratio looks similar to early 2021.
At that time, the markets rallied significantly after this spike.
Current Market Structure
Insider selling has been making headlines, but it’s not at unprecedented levels.
Turning bearish now, based on this ratio, would be like turning bearish in March 2021.
Back then, the S&P 500 still had room to run.
The market only turned bearish in early 2022, when the S&P 500 dropped below key moving averages.
Right now, that’s not the case.
The S&P 500 maintains a strong uptrend above all key moving averages.
However, we recently alerted our clients to potential short-term pullback risks.
Our analysis suggests a possible pullback to 5600 points, which we view as the maximum expected drawdown.
From there, we’d anticipate substantial upside.
To manage risk, we’ve initiated a hedge position, shorting the S&P 500 to protect returns while maintaining our overall bullish stance.
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