Corporate insiders may have turned bullish about the U.S. market but their enthusiasm for their own company’s stock didn’t last long.
During the market’s lows back in March, insiders were aggressively taking advantage of the cheaper prices at which their companies’ shares were trading. But in the wake of the market’s monster rally since then, they quickly decided to step back.
That’s the conclusion that emerges from insider data provided last week by Nejat Seyhun, a finance professor at the University of Michigan. As one of academia’s leading experts, he knows how to use corporate insider behavior to predict the market’s path forward.
To review: Corporate insiders includes company officers, directors and large shareholders. And they are required to more or less immediately report to the SEC whenever they buy or sell their company’s shares.
Seyhun says that its worth paying the most attention to officers and directors. His research has concluded that firms’ largest shareholders — typically big institutional investors — don’t tend to beat the market on average.
He does his analysis monthly by calculating the percentage of firms for which officers and directors are purchasing more shares than selling. Recently, he noticed that this percentage was cut almost in half in April from March, to 33% from 62%, as the accompanying chart shows.
That March reading had been one the highest readings Seyhun has seen in his several decades of following corporate insiders. The April reading, in contrast, is just barely higher than the 10-year average.
In our previous mention of Seyhun’s research at the end of the first week in March, insiders were selling their company shares at a fast clip — a bearish omen. The market fell sharply over the subsequent two weeks, at which point the insiders started buying in a big way.
The current message of the insiders, Seyhun told us, is that “as far as [the insiders]… are concerned, market price is about right at this time based on what they know now.” Whether you think this is good or bad news depends on whether you’re more inclined to see the glass as half full or half empty.
Regardless, the insiders in effect are saying, “It’s unlikely the market will stage a repeat of the market’s greater-than-30% rally off the March lows.”
Start the Day Up $77,000… End the Day DOWN $9 Million!!!
That’s Syed Shah (not pictured), a 30-year-old day-trader in Toronto whose ill-fated attempt to dip his toe into the oil pits was covered in a recent story by Bloomberg News.
On April 20, Shah started with about $77,000 in his account. He put $2,400 toward buying crude, first at $3.30 a barrel, and then more at 50 cents. From there it got interesting. Ultimately, as the historic plunge in oil prices took hold, he was able to load up on futures at a penny each.
Turns out that penny price tag was pretty expensive.
In reality, crude was already trading at negative-$3.70 a barrel — not at one cent — but the minus sign wasn’t recognized due to a glitch in the Interactive Brokers Group’s software. By the end of the day, Shah got the message: His $77,000 had turned into a $9-million debt.
Shah explained to Bloomberg News that he didn’t sleep for three straight nights after that.
Earlier this week, Thomas Peterffy, the billionaire chairman and founder of Interactive Brokers, took the blame for the issue that affected many more traders beyond Shah.
“It’s a $113-million mistake on our part,” he said, adding that traders will be made whole. “We will rebate from our own funds to our customers who were locked in with a long position during the time the price was negative any losses they suffered below zero.”
Whew, this article even made us sweat!
Market Wrap
The Dow finished solidly lower Monday and the broader market ended mixed for the major U.S. stock benchmarks, as investors mulled hurdles to restarting the economy.
The Dow Jones Industrial Average shed 109.33 points, or 0.5%, to end at 24,221.99. The S&P 500 index gained less than a point to close at 2,930.19. The Nasdaq Composite advanced 71.02 points, or 0.8%, to finish at 9,192.34
Stocks posted back-to-back gains Thursday and Friday that left the Dow up 2.6% for the week at 24,331.32, while the S&P 500 saw weekly rise of 3.5% to 2,929.80. The Nasdaq Composite jumped 6% last week to 9,121.32.
Equities have bounced back strongly after the S&P 500 dropped by roughly a third from a February record high through March 23. Monday’s close left the Dow 18% below its all-time finish, while the S&P 500 is 13.5% below its record close and the Nasdaq was 6.4% away from its record finish.
The S&P 500 and Nasdaq booked three consecutive sessions of gains Monday, while the Dow snapped a two-day win streak, as investors braced for a bumpy road to reopening the U.S. economy amid the pandemic, which in April claimed more than 20 million jobs and pushed the unemployment rate to 14.7%.
“In the near-term, are we set up for some disappointment? Sure, especially as we struggle with how to reopen parts of the economy again,” said Brian Levitt, global market strategist for Invesco, in an interview with MarketWatch.
Hopes that growth in the U.S. will rebound swiftly have been fueled by a slowdown in the rate of COVID-19 infections and efforts toward easing coronavirus-related social restrictions in parts of the country. Despite this, there exist some concerns that stock gains have been led by big-tech companies that benefit from stay-at-home orders, rather than sectors like financial stocks that typically lead in a recovery.