Insiders are Selling Their Stocks Like Never Before…

Retail investors have poured $155 billion into the stock market since the start of this year. That's the largest recorded buying spree by retail investors. And while everyday investors are piling into the stock market, corporate insiders, on the other hand, seem to be cashing out. This chart tracks insider buying and selling activity. And right now, it is flashing a warning. The ratio has just dropped below 0.21, one of the lowest levels in the last two decades, which means for every insider buying shares, there's nearly five that are selling. At the same time, the percentage of publicly traded companies that are seeing net buying from corporate officers has dipped to the lowest level in over a decade. Yesterday, we sent a memo to our clients to highlight that we are flipping to a more cautious stance on the stock market in the short term, and that we're hedging against a pullback. I'm going to show you exactly what is going on in this video. Corporate insiders, CEOs, CFOs, COOs are supposed to be the ones with the best view on what's really happening inside their companies. That's why they're often referred to as the smart money. Retail investors, on the other hand, are often labeled as the dumb money. Today, smart money is selling and dumb money is buying. Now, before you pour your life savings into a leveraged short S&P 500 ETF, I do want to say that the picture is a little bit more complex. Because the truth of the matter is, today's macroeconomic environment is very favorable for the stock market. And we can see that on this chart that overlays the S&P 500 against real U.S. GDP growth. In each of the last three decades, periods of stable economic growth between 2% and 4% have coincided with the strongest stock market performance. Today, although many people do feel worse about the economy, the fact of the matter is that real growth is sitting at 2%. A lot of this is simply being driven by the growth in large technology companies. In fact, if we take a look at the late 1990s, the economy was growing at a similar pace at around 2% to 3% real GDP growth, primarily being driven by the technology sector. This was one of the most profitable moments to be involved in the stock market in history. So, we are currently in an economic environment that is historically favorable for at least corporate America to thrive. And that's not the only thing that's pushing the market higher right now. This chart here shows the growth in the U.S. money supply, or essentially the total amount of money circulating in the U.S. economy. When it increases, it means liquidity is being injected into the financial system at a more rapid pace. When it declines, it indicates that liquidity injection is slowing down. When it goes below zero, like it did right here, it suggests liquidity is being drained from the financial system. Right now, we're seeing a shift. After shrinking throughout most of 2022 and 2023, money supply growth has turned positive again and has been accelerating higher. This is a direct result of the rate cuts from the Federal Reserve that they've been doing over the last year. And it's the first real re-acceleration of liquidity injection we've seen since 2020. There's really only been three other of these kinds of re-accelerations going back to the 1990s. And when we look at what happened to the U.S. stock market during these periods, we see this is historically a very strong upwards driving force for stocks. So in many ways, the excitement from retail investors makes complete sense. The macroeconomic backdrop is supportive and liquidity is improving, which tends to be conditions where stocks rise. Retail investors might not be wrong for jumping into the market aggressively here. So if everything is so bullish for stocks, how come insiders are going on a selling spree right now? As mentioned earlier, insiders are supposed to be great market timers, given their superior knowledge on the underlying health of U.S. companies. And today they are selling right as the stock market has reached extremely expensive levels. This is the forward price-to-earnings ratio, and currently it is suggesting the stock market is at one of the most expensive levels in history. The only other time that the stock market was this expensive was in 2021 and in the late 1990s, and this did make the market quite vulnerable to a subsequent readjustment in valuations. So on the surface, it might look like insiders are making a reasonable decision here to sell as stocks are looking irrationally overpriced. But you may have heard the saying, the market can stay irrational longer than you can remain solvent. High valuations do not always lead to an immediate correction. For instance, let's zoom in on this example of June of 2020. Right here, the S&P 500's P.E. ratio reached 23, which is roughly the same level as we are today, and yet over the 12 months that followed, valuations stayed at the same level, and the S&P 500 index made some incredible gains over that period. Something quite similar happened in 1998. The S&P 500 began trading at a P.E. ratio above 20 right here, but the market remained expensive over the next two years. And during those two years, the S&P 500 index posted over a 50% return before eventually a recession occurred and triggered a large correction in valuations. That setup looks very similar to the one that we have today. So it could actually be that insiders are making the wrong call here, at least in terms of short-term S&P 500 performance. So even though insiders do seem to be selling today, that is not the reason that we've turned short-term cautious on the S&P 500. In the last video that we posted during this small S&P 500 pullback, we highlighted that we actually expect stocks to move higher heading into the end of the year. I would go as far as saying that the S&P could reach 7,000 points by the end of this year, but it won't happen in a straight line. Right now, that is what the stock market is doing. It has been going in a straight line, which has made it extended during the seasonally choppy period for the stock market of August, September, and October. We think there could be dips during this period, and we'll be using them to increase our exposure. We'll be taking advantage of this with our members at Bravo's Research. It is a myth that retail traders cannot outperform the market. Yes, most people fail at it, but with the right guidance, the right mindset, and the right research, it is possible to achieve truly superior returns in the marketplace as a retail trader. I put together a video where I break down some of the biggest trading lessons that I learned the hard way over the last few years. I'll leave the link in the description down below. I strongly recommend that you watch it before you start trading or investing. It could save you a few years of frustration. Thank you for watching.