Those with their ears closest to the ground on companies are selling equities, while others are buying. This isn’t exactly a positive for stocks.
Jitters about potential weakness in stocks have been mounting. With the
up 11% year to date, pricing in a fast economic rebound, high valuations and exuberance among investors are leading some on Wall Street to wonder if the market is in a bubble.
If any indicator highlights that the average investor is too optimistic, it is that company insiders have been selling stocks, while much of the rest of the market is buying. The ratio of insiders’ sales to buys recently hit 143—or 143 sales for every purchase—according to data from Sentiment Trader. That is the highest dating back to 2006 and is nearly double the previous peak.
While an elevated ratio of buying to selling is more indicative of market strength ahead than a high sales-to-buy ratio is a sign of weakness, “it would be better to see this [statistic] at least in neutral territory,” wrote Jason Goepfert in a note.
Meanwhile, investors are borrowing against their existing holdings of stocks, a dynamic that has sent outstanding margin debt up 72% year over year. That is the fourth-highest increase since at least 1960.
The higher the level of margin debt—borrowing secured by stockholdings—the greater the chances are that the market could fall hard if prices move the wrong way, creating a sudden need for investors to raise cash.
More broadly, measures of market sentiment are looking “euphoric,” in Goepfert’s words.
A risk-appetite index that measures investors’ level of optimism by considering equity and credit valuations, the price of gold, and the performance of economically-sensitive sectors versus safer ones recently hit a score of just above 1,000, the second-highest since early 2018. When the index hits a new high, market weakness is often around the corner.
In early 2020, the index hit what was then its second-highest level, just before the S&P 500 fell 34% into a bear market. And in early 2019, it spiked to roughly its current level, just before the S&P 500 took a 6.5% dip.
None of this means stocks won’t keep sailing higher, but don’t be surprised if the water is choppy in the near term.
Write to Jacob Sonenshine at firstname.lastname@example.org