Should investors be concerned with the lowest level of corporate insider buying since 2010?
Corporate insider buying has reached a 15-year low at a time when market valuations are at their highest levels. Analysts are taking precautions by shorting positions, preparing for a potential market crash.
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Bravos Research reports that approximately 50% of S&P 500 companies now have a Price-Earnings (P/E) ratio above 20, indicating that stocks may be overvalued. This raises concerns about the sustainability of the current stock market rally and its implications for investors.
The P/E ratio divides a stock’s price by its earnings per share and is one of the most commonly used fundamental analysis indicators. This means that half of the top 500 U.S. stocks are priced at a 20x premium compared to their earnings.
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S&P 500 Company Valuations (P/E). Source: LSEG Datastream / Yardeni Research / Bravos Research
High valuations and insider buying caution
The current market environment is characterized by high valuations, and according to Bravos Research, “This won’t end well.”
Furthermore, the lack of insider buying could indicate that corporate insiders believe their stocks are overvalued and are adopting a cautious approach. This is noteworthy because historical data shows that insider buying often occurs at market bottoms rather than peaks.
However, high valuations alone do not guarantee a market collapse, although they do pose a significant risk to investors. The market has experienced periods of sustained high valuations, such as in 2020, where despite expectations, there was a strong rally.
Corporate Insider Buying. Source: Sentimentrader/Bravos Research
Historical context and market trends
Bravos Research provides historical context, noting that periods with many stocks having high P/E ratios are typically followed by corrections. However, in 2020, valuations remained high for nearly 2 years, during which the market rallied strongly, defying expectations of a correction based on valuations.
This suggests that while high valuations are a warning sign, they do not always lead to immediate downturns.
The report also addresses the correlation between insider buying and market peaks, stating that in previous instances of low insider buying in June 2014, October 2016, January 2021, and February 2023, significant market peaks did not occur. Therefore, the current low level of insider purchases does not definitively indicate that it is time to sell.
Despite the low level of insider buying, the S&P 500 is in a strong upward trend, sending conflicting signals, according to Bravos Research. They caution, however, about potential pullbacks and have alerted clients to the possibility of a pullback towards 5600 points.
If this occurs, they expect the market to resume its upward trend afterward. To mitigate risks, investors have implemented strategies such as shorting the S&P 500 to hedge against potential downturns.
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More on the S&P 500 dynamics and trends
Meanwhile, the dominance of the Magnificent Seven stocks in the S&P 500, as reported by Finbold, adds another layer to the analysis. These tech giants have significantly driven the index’s performance, with a collective market cap of over $18 trillion.
The Kobeissi Letter highlighted, “The group is up 50% year-to-date, nearly doubling the S&P 500’s gain of 28%.” This concentration of growth in a few stocks may raise concerns among investors regarding market breadth and sustainability.
In conclusion, while the low level of insider buying may indicate caution, it is not a definitive signal of immediate market downturns. Investors should remain vigilant, consider broader market dynamics, and potentially adopt strategies to hedge against potential volatility. Overall, the current market environment calls for a balance of optimism and strategic risk management.
Featured image from Shutterstock.
