Bad signs for the epic market rally

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In the previous post, I discussed reasons that the stock market is rising despite the economic devastation of the pandemic. In this post, I’ll discuss ominous signs from the market rally:

  • Top 1% account for most of the gains: The market is very top-heavy. 1% of the stocks in the S&P 500 - Alphabet, Amazon, Apple, Facebook and Microsoft - account for more than a fifth of the S&P 500’s market value. While those tech giants have gained around 40 percent so far this year, the 495 other stocks in the index have collectively lost a few percentage points. This is bad because the US workforce is concentrated in the other 99% of the stocks.
  • Insider selling is booming: Some leaders of corporate America are skeptical about the sustainability of this rally and are rushing to cash out. According to CNN Business and TrimTabs Investment Research, insiders have dumped more than $50 billion worth of shares since the start of May. The same source also notes that August is on track to be the third month of the past four where insider selling exceeded $15 billion and insider selling is at a pace unseen since 2006. NY Times also reported that the data platform AlphaSense sifted through regulatory filings for DealBook and found that disclosures of executive stock sales so far this month have already surpassed last month’s total, and are on track to beat the record set in February, when the market set its previous high. The pace of insider selling could be a warning sign for the booming market because insiders, by definition, are privy to more information about the true health of their companies than average investors. And if they were confident in the market rally, insiders would be unlikely to sell now. Yet many are heading for the exits just as markets make new milestones. 

It's important to note that while insiders must document when they buy and sell stock, they don't need to say why. That means it's not clear whether insiders are dumping stock because they fear a market bubble or simply because they need to raise cash to buy a new home. 

Along with the current state of the economy, the aforementioned signs raise concerns that the market has gotten ahead of itself and they are certainly reasons to be cautious on US equities. However, they don’t tell us whether the valuations are indeed inflated or how much longer the momentum in the market will continue. They also don’t alter the driving force for the market rally: easy money from the Federal Reserve. What do you think? Are the aforementioned signs red flags about the market rally?


Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

 

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