There appears to be two arguments against stocks right now, firstly that the market has gone too far too fast, and secondly insiders are selling. However, when you look a little deeper both arguments seem full of holes.
Yes the S&P has made dramatic gains since the low on the 9th of March to the high a few days ago (some 35%). However, March 9th is just one point in time. If we expand our window one month prior to February 9th, the S&P 500’s rally shrinks to an ordinary 3%…..on a year to date the S&P is actually negative. A negative return for 6 months is not exactly our idea of a market going too far too fast!
The last few weeks have seen a number of reports come to the fore highlighting the high level of selling by insiders. Commentators interpret this as a “sign” that corporate executives don’t think the move in equities is justified by fundamentals. However, one must understand that a negative outlook isn’t the only reason insiders sell stock. In any case we should note that these are the same insiders who were ‘piling into’ stocks just before the stock market’s peak in August 2007, and then again in March 2008. Experience tells us that while insiders maybe privy to information regarding a particular stock they do not have any information that would affect the outcome of a market or sector. We don’t think that insiders can foresee a macro downturn coming (if indeed it is) so we are not taking insider selling too seriously. From a contrarian perspective perhaps we should see this insider selling as a buy signal!
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