Major Increase in Selling by Insiders is Warning to Stock Market Investors. Company insiders have superior knowledge of the direction of future company growth. Therefore they have advanced knowledge of where their companies’ stock price is headed. Recent insider selling is on pace for a two-decade high (see chart below). That should be ringing alarm bells for savvy investors. These investors know heavy insider selling is often followed by big market tumbles.
They’re not the only ones. Looking at other market players, it’s a consistent theme. Among mutual fund managers, retail investors, Rydex mutual fund timers, the AAII folks, and pension funds, the average cash balance is ticking near all-time lows.
As Babak pointed out, the Smart Money Flow Index appears to be making a “divergence” with the stock market. This happened in 2018 as well, before stocks cratered. *The Smart Money Flow Index assumes that the “smart money” trades in the last hour of each session and the “dumb money” trades in the first half hour of each session. This assumption is flawed, especially due to the increasing popularity of ETFs. Nevertheless, the Smart Money Flow Index remains popular.
Buy-back Blackouts Could Be Trouble For The Stock Market. Last week’s chart highlighted the fact that over the last several years corporations have been the dominant buyers in the market. In a few weeks, the corporate buyback blackout period will commence. Corporations are restricted as to when they can purchase. This restriction is based on when each corporation’s earnings are reported. This chart gives the percent of companies in a blackout period by date. The blackout period peaks toward the end of October and declines thereafter. This will be a vulnerable time for the stock market, as the largest buyers will be sidelined until earnings are over. Stay cautious!
As the second chart below shows, corporations have been the main buyer of stocks since the market low. Corporate Stock Buyback Programs Are Not a Healthy Sign. As the first chart shows, rather than spend corporate profits on expansion, they are spending the money mainly on dividends and buying back their own stock.
Notice in the first chart how the 2018 tax cut boosted stock buybacks and dividends and not so much capex spending, as we were promised. That’s not how things were traditionally done. Used to be capex spending was double the amount spent on dividends and buybacks. What does this all mean? Corporations are not confident of future growth to boost revenues and earnings. So instead of spending on expansion they are spending money to reward shareholders via dividends and buybacks. Fewer shares outstanding obviously increases earnings per share. This also begs the question of what happens when corporate buybacks slow if they are by far the main support of the market. Our answer? Watch Out!