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Category: Chart of the Week

Here’s Another Important Bearish Indicator: Company Insiders Sold Big Into Major Market Rebound

Here’s Another Important Bearish Indicator: Company Insiders Sold Big Into Major Market Rebound. As the insider transactions ratio chart below shows, major selling by company insiders has moved this indicator’s market forecast from bullish to bearish. The Thompson Reuters chart shows the ratio of insider sales to buys at 44. That’s well into bearish territory.  The big pickup in sales is a major change from the insider buying frenzy sparked by the market bottom in March. That buying frenzy, as it turns out,  was an accurate indicator that insiders, who have superior knowledge,  thought their shares had been oversold. Now, major insider selling into the market rebound should be heeded as an important indicator that the company executives think their shares are overbought and  could be in for a big tumble. We should note that this  is one of  number of bearish market indicators we’ve highlighted recently. Moreover, these sell signals come at time of bleak economic reports, led by the news that the second quarter Gross Domestic Product (GDP) dropped by 32.9% as a result of virus-induced business shutdowns. That’s the worst recorded GDP drop ever. And a warning of things to come as the continuing spread of the pandemic is leading to the close of more businesses, including many that had been prematurely opened, as it turns out.

Here’s Another Important Bearish Indicator: Company Insiders Sold Big Into Major Market Rebound
Here’s Another Important Bearish Indicator: Company Insiders Sold Big Into Major Market Rebound

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Watch Out: Companies are Flooding the Market With Hundreds of  Billions of Dollars in New Shares

Watch Out: Companies are Flooding the Market With Hundreds of  Billions of Dollars in New Shares.  For the last 10 years public companies  have been the major support for stock market prices by buying back stock and shrinking the market float. Logically, the less shares that are available, the more they are bid higher by buyers. Now, the reverse is happening. While companies have pulled back buying dramatically, the market is being flooded with new offering, among other things that increase the float. Some $310 billion in new offerings is headed for the market,  as the charts from TrimTabs Investment Research show. Says TrimTabs, “new offerings are bearish for liquidity because they increase the shares in the stock market.”

Watch Out: Companies are Flooding the Market With Hundreds of  Billions of Dollars in New Shares Note : New offerings exclude Capital Pool Companies and Closed end funds . Jul 2020 data is as of Jul 16

Meanwhile as the floodgates are opening for new shares, there’s strong warning signs of  danger ahead for the market. For one thing, investor sentiment, which is an important contrarian indicator of the stock market’s direction is extremely bullish. So that’s one bad sign. Another is that the dramatic retreat in corporate buybacks means insiders themselves are uncertain about their companies’ own prospects. And last but certainly not least, there’s  the fact that the pandemic is causing great uncertainty about where the economy and the market is headed. So, all this added liquidity comes at a time of great market uncertainty. That raises major questions about the availability of enough buyers to keep prices up. particularly with so much stock flooding the market. In other words, all this added liquidity  means stocks will fall further in a downturn. There’s a joke about a panicked investor calling his broker to sell all his shares as the market is headed sharply down. The brokers reply: To who?

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This Stock Market Indicator Just Hit 20 Year Lows

This Stock Market Indicator Just Hit 20 Year Lows.  Greed is never a good sign in the stock market. Why?  Because the market has already reacted to so much good news.

The chart below is the p/c ratio. It is a formula of puts and calls bought in the market place. It’s a typical fear and greed type

Indicator. However I have not seen it get this greedy in many years.

This Stock Market Indicator Just Hit a 20 Year Lows
This Stock Market Indicator Just Hit a 20 Year Lows –  Chart courtesy of Hedge Fund Telemetry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Q Ratio Indicates Stock Market Value Historically is Overpriced

Q Ratio Indicates Stock Market Value Historically is Overpriced.  We use many indicators to analyze stock market value and future trends. One such popular indicator is the Q Ratio. It was developed by Nobel Laureate James Tobin to estimate the fair market value of the stock market for the long term. The ratio is the total price of the market divided by the replacement cost of all its companies.

As you can see from the chart below, present  fair valuation is quite high at 1.79. Therefore, this suggesting the market is trading at 129% above the mean historic replacement cost, says Jill Mislinski of Advisor Perspectives. Note that the all-time Q Ratio high at the peak of the Tech Bubble was 2.17, about 180% above the historic average of replacement cost. The  all-time lows in 1921, 1932 and 1982 were around 0.28, which is approximately 63% below replacement cost. Mislinski cautions this is not a short-term indicator. “Periods of over- and under-valuation can last for many years at a time,” she says. That means the Q Ratio is “ more appropriate for formulating expectations for long-term market performance”.

Q Ratio Indicates Stock Market Value Historically is Overpriced
Q Ratio Indicates Stock Market Value Historically is Overpriced

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Companies are Raising Their Earnings Outlook: Be Careful!

Companies are Raising Their Earnings Outlook: Be Careful!  Spurred by pandemic fears many companies earlier this year pulled  way back on their profit outlooks. In fact, many said  they couldn’t make any predictions at all. In recent weeks, however, with an increase in business openings and employment, these companies,  and the analysts who follow them, have become increasingly optimistic about future earnings. As the chart below shows, a great percentage of  companies are raising their earnings. In fact, by some definitions companies haven’t raised their outlooks to this degree in 20 years.

So ,why are we telling you to be careful? The most obvious reason is that record daily Covid-19 infections now are forcing even the reddest states to close many businesses that had been reopened. So, the economic outlook may not be as rosy as the companies thought, despite June’s big employment growth. Equally important is that historically by the time companies have become this enthusiastic about future earnings, investors and the market already have anticipated the gains. That means the stocks and the indexes are already fully priced in anticipation of the higher earnings,  And fully priced means that bad news, including lower-than expected earnings, is a setup for a big market drop. So be careful and don’t become victim to irrational actions spurred by the fear of missing out (FEMO). FEMO historically results in investors buying too high and selling too low.

Companies are Raising Their Earnings Outlook: Be Careful!
Companies are Raising Their Earnings Outlook: Be Careful!

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