Monday, December 4, 2006
I believe the stock market could be in for some very nasty weather in the coming weeks.
Actually, the warning signs have been there for some time. The first sign of impending doom: Beginning early September, up until this week, the market has gone straight up... and I mean straight up. As of last Friday, the S&P 500 hasn’t fallen more than 1% for 125 days straight. This is one of its longest winning streaks in the last 25 years.
This defies all logic. The stock market simply does not go straight up. Even in a bull market, the market goes up, retreats a bit, then goes up some more.
Warning sign No. 2: Investors have become overly complacent. This development is most obvious in the Chicago Board of Options Volatility Index (^VIX), which measures investor unease. Two weeks ago, it hit a 15-year low.
These two alone had me concerned about the market’s future. And then came warning sign No. 3: Insiders started dumping shares... by the truckload.
Because corporate executives receive massive amounts of stock compensation, insider sales have historically outnumbered insider purchases by 20 to 1. Well, insiders sold $4.5 billion worth of stock in November.
With a paltry $33 million in buys, this brings the insider sell/buy ratio to 136 to 1: more than six times its historic average.
This is the highest the insider sell/buy ratio has ever been. If it holds up, we’re in for a very rough end of the year and 1Q07. Even if the ratio falls, the market’s near future doesn’t look too promising.
Altogether, 19,976 corporate insiders sold their companies’ shares in less than a month. By headcount, that’s more than three times the number of insiders buying.
The top sellers by sector were finance, technology, and consumer discretionary. Finance and technology are no-brainers. Both sectors are obscenely generous at dishing out stock compensation. And it’s getting to be that time for executives to cash out their options and buy that vacation home in the Bahamas... or Namibia, depending on whether or not the options were backdated.
By industry, the top sellers last week were diverse financial services, systems software, computer storage, pharmaceuticals, and services data processing. Most interesting of this sector selling is pharmaceuticals... it seems the insiders believe a government controlled by Democrats doesn't bode well for their stock holdings.
Certainly, some of this selling can be attributed to profit-taking before the year's end or even holiday planning. But taken along with the market’s recent activity and the VIX’s recent bottom, this degree of selling is a very serious warning.
The guys who run the companies are taking their money out of the market. Consider doing the same with your speculative money.
Top performing ETFs in 2006: Internet Infrastructure... iShares China... Vanguard REIT... iShares Mexico... Vanguard Telecom.