To The Moon

$.SPX(.SPX)$ $Amazon.com(AMZN)$ $Microsoft(MSFT)$

Corporate insiders are currently selling stock at the fastest rate in over 20 years. This chart illustrates the ratio of corporate executives who are net sellers compared to net buyers of their own company's stock. Historically, this ratio has exceeded four only a handful of times over the past two decades and is now at an all-time high. This raises the question: do high-level insiders possess information prompting them to sell at such an unprecedented pace?

Corporate leaders, such as CEOs and board members, have a deep understanding of their companies. When these insiders begin selling large amounts of stock, investors often view it as a potential warning sign of trouble in the market. For example, Warren Buffett, one of the most prominent corporate figures, is holding a record $325 billion in cash. Currently, cash makes up 30% of Berkshire Hathaway's total assets, signaling a cautious stance. The last time Buffett maintained such high cash levels was between 2004 and 2007. Following that period, the 2008 financial crisis struck, during which Buffett reinvested heavily into stocks.

Could today’s selling activity by corporate insiders, including Buffett, signal an imminent market downturn? Not necessarily. The data might point to a simpler explanation. The stock market has experienced significant gains recently, with insiders engaging in logical profit-taking. After a robust rally since October 2022, which delivered nearly a 70% return in just over two years, insiders may simply be capitalizing on high stock prices to lock in profits. While a company’s fundamental operations remain relatively stable month-to-month, its stock price can fluctuate dramatically. With prices rising 20% or more, selling shares is often a strategic move to secure gains.

Another possible explanation for the surge in insider selling is that some corporate insiders may view their company's stock as overvalued relative to its intrinsic worth. The broader stock market is also becoming increasingly expensive. Forward price-to-earnings (P/E) ratios, which compare current stock prices to projected earnings over the next 12 months, are nearing historically high levels. This reflects a high degree of investor optimism about future economic growth—similar to the exuberance seen in the late 1990s.

In 1999, investors drove stock prices to extraordinary heights, fueled by expectations that the internet would revolutionize the economy overnight. This speculative fervor pushed P/E ratios to an unprecedented 24. Today’s P/E ratios are approaching those levels, and insiders may see these high valuations as an opportunity to sell their stock. However, history suggests that high valuations alone are not a reliable signal to sell. For instance, by 1997, the stock market had already reached extreme valuations, but the speculative frenzy continued for another two years.

It’s possible we could see a similar scenario unfold today. Corporate profit margins are significantly higher now than they were in 1999, which could support even higher market valuations if conditions remain favorable. Companies today are far more efficient, leveraging advances in technology, automation, and artificial intelligence to cut costs and boost productivity. The rise of software has enabled business models with much higher profit margins than those of traditional companies from the late 1990s. In contrast, tech companies during that era were often burning through cash to build infrastructure and acquire customers, leaving them far less profitable.

Today’s tech giants have built strong, cash-generating businesses, which could justify higher valuations compared to 1999. This suggests that insiders selling now might be acting prematurely. Another factor supporting the possibility of rising valuations is the Federal Reserve’s projected plan to gradually lower interest rates over the next year. This mirrors the late 1990s, a period when rate cuts also coincided with rising stock markets.

Historically, when the Federal Reserve pauses or lowers interest rates without the economy being in a recession, the stock market tends to perform well. This pattern can be seen in several highlighted periods, where rate cuts created favorable conditions for market gains. However, when a recession eventually occurs, it often triggers a significant market downturn. This raises the question: are insiders selling now to prepare for an impending economic decline?

It’s worth noting that corporate insiders don’t have a flawless track record when it comes to timing market downturns. Over the past 20 years, insider selling has surged above a ratio of four during just four periods: 2005, 2014, 2017, and 2021. In each case, the excessive insider selling preceded major market tops, but the time lag between insider activity and market peaks varied greatly. For instance:

• In 2004-2005, insiders sold aggressively, yet the market continued to rally for three more years before the 2008 financial crisis. Selling early would have meant missing out on substantial gains.

• Insider selling spiked before the 2015 earnings recession and the 2018 U.S.-China trade war sell-off, but significant market declines came later.

• In 2021, tech executives like Jeff Bezos and Satya Nadella sold massive blocks of shares during the Fed’s tightening cycle. However, the market didn’t peak until months after these sales.

This pattern highlights that while periods of insider selling often align with market tops, they don’t consistently signal an immediate bear market. Stocks have frequently climbed for months—or even years—after insiders began selling.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub