A Stock Market Crash Could Be Ahead as Insiders Sell at a Rapid Pace
The case for a stock market crash happening soon keeps on getting stronger. If you’re a stock investor who has bought into the idea that the markets are headed higher, you may want to rethink your take.
Investors should consider observing the actions of corporate insiders, which currently suggest that a stock market crash could be looming.
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You see, insiders know a lot about the companies they work for. If they are selling the stocks of those companies, it might mean something.
Mind you, sometimes insiders sell stocks that they own in order to pay for expenses or because they are forced to for personal reasons. But what’s worth watching is the pace at which they sell their shares. If they sell massive amounts all of a sudden, that may be a sign to be worried.
Alarmingly, we see corporate insiders dumping their shares pretty often these days. That makes those insiders seem pessimistic, which shouldn’t be taken lightly, whatsoever.
According to TrimTabs Investment Research, Inc., a leading institutional research firm, corporate insiders sold $8.4 billion in shares in May. In June, this figure grew to $9.2 billion.
“Large US companies have become cash machines for the top insiders who run them,” said David Santschi, director of liquidity research at TrimTabs. (Source: “CEOs are dumping stock in their companies. Here’s what that means,” CNN, July 17, 2018.)
Insiders’ Tricky Way of Selling Their Shares
Here’s the thing: insiders are being slightly tricky about selling their shares. Maybe this is why the current state of affairs is not getting a lot of mainstream attention.
It’s a two-step process.
Step one is companies announcing that they are going to undertake massive share buybacks.
In case you didn’t know, share buybacks have soared over the past few years. In 2017, S&P 500 companies purchased $519.0 billion of their own shares. And they have been back at it again this year; in the first quarter of 2018, they purchased almost $189.1-billion worth. (Source: “S&P 500 Stock Buybacks,” S&P Dow Jones Indices, last accessed July 20, 2018.)
If we do simple extrapolation based on first-quarter numbers, we can determine that S&P 500 companies could be buying much more in 2018 than they did the year prior.
Step two is insiders selling their personal shares to the company during the buybacks.
According to a study by the U.S. Securities and Exchange Commission (SEC), in 2017 and early 2018, insider selling doubled right after there were buyback announcements.
When insiders sell their own shares, they are telling the world that the company is undervalued.
Stock Market Outlook: Losses Could Be Ahead
Dear reader, it can’t be stressed enough that insiders are worth watching closely. And their actions have been loud and clear. They are pessimistic. I wonder if they see something brewing; a stock market crash perhaps?
I believe that it’s important for investors to now focus on capital preservation. Even insiders are reducing their exposure to stocks.
The risk of a stock market crash is much higher now than at any point in the past few years. Consider this a warning that significant losses could be ahead.
Keep in mind that capital preservation doesn’t mean selling everything and staying on the sidelines. It could be as simple as setting stop-losses on existing positions, so as not to lose a lot of money in case of a sell-off.
