CEOs, leading shareholders and other senior executives are rushing to take chips off the table.
So-called insiders have dumped more than $50 billion worth of shares since the start of May, according to TrimTabs Investment Research. August is on track to be the third month of the past four where insider selling exceeded $15 billion, TrimTabs said. Insider selling is at a pace unseen since 2006.
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.
“If you’re an executive and you see a challenging economic environment, the market is giving you a gift with this sharp rebound,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Insiders apparently are thinking this is a time to exercise options.”
“Sentiment is very giddy. Valuations are inflated. But that can stay that way for some time,” said Boockvar.
‘The market doesn’t care’
Few could have imagined just how quickly the markets would recover from a pandemic that caused mass unemployment and a wave of corporate bankruptcies.
If the S&P 500 closes above 3,386.15, it would represent the benchmark index’s first record high since February. By some definitions, that would mark the end of the bear market, making it the shortest in history, according to S&P Dow Jones Indices.
“Insiders may be looking at stocks and saying, ‘The market has gotten way ahead of itself,'” said Marc Chaikin, founder of Chaikin Analytics, a quantitative investment research firm based in Philadelphia.
Yet those concerns among insiders don’t alter the driving force of the market rally: easy money from the Federal Reserve.
“The market doesn’t care. It’s a Fed-induced, liquidity-driven market,” said Chaikin. “Money has nowhere to go.”
Chaikin said insider selling has been heavy at two companies he’s very bullish on: biotech giant Regeneron and chip maker Nvidia, each of which have seen their share prices skyrocket this year. But Chaikin is unfazed.
“That doesn’t really tell me anything. In a momentum market, insider selling is not a yellow flag,” he said.
Why are insiders selling? No one knows
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.
“Maybe they are literally just figuring out their own personal balance sheets. These are real people making real economic decisions,” said Nicholas Colas, co-founder of DataTrek Research.
Colas added that corporate executives may also be choosing to cash in chips because they fear for their own jobs as companies mull cost-cutting during the pandemic.
“These aren’t Robinhood traders,” said Colas. “They are executives trying to figure out the right amount of cash in the bank in case they get laid off.”