Is It a Bad Sign That Company Insiders Are Dumping Their Stocks at Record Levels?

Company insiders on Wall Street are selling their stocks. While it’s certainly not uncommon for executives to sell their stocks, the timing should make retail investors sit up and take notice. With the major indices at record levels, the S&P 500 already up more than 11% in 2021, and valuations in nose-bleed territory, it makes you wonder if company insiders believe we are in a stock market bubble. And that it could burst.

Are Insiders Selling Because the Stock Market Is Overvalued?

Company insiders buy and sell stocks all the time. And just because a company insider is selling their stocks isn’t necessarily a bad thing. The CEO of a small company might only make $150,000 a year and needs to drum up money to pay for his kids braces.

But that isn’t what’s happening on Wall Street right now.

Elevated stock valuations and the possibility we’re in the late stages of a bull market is not lost on corporate executives. At a time when retailer investors are snapping up stocks, company insiders are selling.

The ratio of insiders’ sales to buys recently hit 143. For every 143 sales there was one purchase. That’s the highest level since 2006 and nearly double the previous peak. An elevated ratio of buying to selling is a bullish indicator while a high sales-to-buy ratio is a bearish indicator. Suffice is to say, Wall Street executives are bearish on the stock market.

In a flashback to 1929, investors are borrowing against their holdings of stocks, pushing margin debt up 72% year-over-year. That represents the fourth largest increase since 1960.

And we all know what happens to stocks when a margin call occurs. If prices tumble investors will be in a desperate bid to raise cash. And there are a lot of new investors trading on the assumption that stocks only go up.

In the first quarter of 2021, Charles Schwab opened 3.2 million new retail investor accounts. That’s more than it opened in all of 2020.

Correlation isn’t causation. Just because insiders are selling and inexperienced retail investors like those using online platforms like Robinhood are buying, it doesn’t mean the stock market is going to crash. Investor euphoria suggests stocks will continue to march higher.

But you can’t ignore the fact that the brightest minds on Wall Street are not so quietly taking profits off the table.

The fact is that investors should be prepared for significant market volatility in the near term. Longer out, bull markets always give way to bear markets.

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Company insiders are selling their stocks at the fastest pace in years. With the stock market in record territory and the economy expected to heat up in a post-pandemic world, are executives selling because they think the stock market is in a bubble and could pop? Should retail investors take the hint and do the same thing?

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