This post may contain affiliate links, for more information see our disclaimer.
As US stocks continue to break all-time highs, company insiders are selling and taking profits. It’s a sign that corporate America doubts the longevity of the market’s hot streak. All-time highs are being broken during the midst of a pandemic and record unemployment, so can you blame them for cashing in?
Stocks have been fueled by quantitative easing and low-interest rates, essentially forcing investors to take on risk. But insiders are selling anyway.
CNN reported that insiders have dumped more than $50 billion worth of shares since the start of May. The amount of insider selling is reaching levels not seen since 2006 and 2007. But who cares? The market has been ignoring all the poor economic news and bearish warning signs since April.
Like everything else, investors and the market have shrugged off the insider selling news. In some sense, it doesn’t matter; however, it isn’t a great sign of confidence either.
It’s important to note that corporate insiders nailed the market bottom. Their massive buying during the correction in March correctly called the bottom. There was also a large rush of insiders selling in February right before the crash. So, is their recent selling a sign of another top? Only time will tell.
What is Insider Trading?
Insider trading is when an individual within a company buys or sells stock. Executives, CEOs, CFOs, board members, and other higher echelon corporate employees are insiders. Illegal insider trading happens when an insider trades based on nonpublic information. Insiders are often exposed to information that could be used to make large returns or save themselves from losses.
Legal trades done by insiders are disclosed in the company’s regulatory filings. The Securities and Exchange Commission (SEC) considers company executives and individuals holding more than a 10% stake in a company as a corporate insider. The SEC actively investigates and charges anyone found guilty of illegal insider trading. However, they are often scrutinized for doing a poor job.
Does Insider Selling Matter?
Insider selling or buying should be taken with a grain of salt. Ideally, as a shareholder, you would prefer to see insiders buying company shares. Insider buying can be viewed as a vote of confidence and that management believes that the company is a worthwhile investment.
But insider selling doesn’t always mean the sky is falling. There are many harmless reasons why an insider may choose to sell, usually, it’s to diversify their portfolio.
There are times an investor should question insider trading activity. When an important insider dumps a massive number of shares at a questionable time–well, that could be a red flag.
Some recent insider selling that caught my attention came from the CEO of Amazon, Jeff Bezos. Earlier in August, Mr. Bezos disposed of over $3.1 billion in Amazon shares. There was no statement as to why he decided to sell so much his stock.
August 2020 US Market Performance
The S&P 500 had its best August performance since 1984. The Nasdaq’s August return was the best on record since 2000.
Long-term treasuries posted a -5% monthly loss but are still up almost 20% year to date. Gold ended mostly flat for the month while hovering between $2,000 and $1,850. The year to date performance among the Nasdaq and Gold is currently neck and neck.
August 2020 Market News Recap
The Fed wants more inflation. At a time of economic distress and unemployment for many, the chairman of the Federal Reserve announced a strategic shift, which allows inflation to run above its previous 2% target. More inflation means a higher cost of living and the devastating possibility of hyperinflation. Fed Chair Jerome Powell explained that it’s a price worth paying to keep inflation from dropping too low and for achieving a stronger labor market.
Teva gets charged with price-fixing. The generic drug giant Teva Pharmaceuticals has endured a price-fixing investigation for several years and is now getting charged by the US Department of Justice. Teva has previously denied any wrongdoing and stated they would be prepared to fight any charges. The company now must decide if it wants to make a deal with prosecutors or battle it out in court.
No deal in sight for the next stimulus package. Democratic and Republican lawmakers are at an impasse regarding the next round of stimulus. The differences lie in the amount of the stimulus and what the funding would go towards. The democrats are adamant about a deal that would cost upwards of $2 trillion that includes funding for the US postal service and enhanced unemployment benefits.
Upcoming IPO buzz. There are some highly anticipated IPOs that could still debut in 2020. The companies on watch include Airbnb, DoorDash, Robinhood, Snowflake, and Compass. The company Palantir Technologies that’s software has been defined as “great for tracking terrorists” is going public via direct listing in late September.
Microsoft and Walmart are teaming up to buy TikTok. The somewhat annoying news regarding the equally annoying social media app has been rampant throughout August. When questioned about the company’s interest, Walmart stated the app could help boost its eCommerce and advertising goals. Other bizarre news regarding TikTok includes President Trump’s statement that the US Treasury would need to be paid as part of the deal. And recently, China is claiming the assets cannot be sold without China’s approval.
Robinhood overtakes rival brokers in trading activity. The popular trading app Robinhood posted 4.31 million in daily average revenue trades (DARTs) in June. The company is dwarfing its competitors in trading activity. TD Ameritrade had the second-highest DART at 3.84 million while Schwab and E-Trade saw less than 2 million DARTs.
Digital Dollar? A recently published transcript from the Federal Reserve revealed that the central bank is exploring a digital currency. The Fed is partnering with researchers at the Massachusetts Institute of Technology (MIT) to further test and research technologies that could develop a Central Bank Digital Currency (CBDC).
Permanent Layoffs Surge. Major companies throughout the US have announced an unfortunate increase of permanent layoffs set to begin in September and October. MGM, Coca-Cola, Spirit Airlines, Salesforce, Nike, and more have all announced fresh rounds of layoffs that include a total upwards of 50,000 soon to be jobless.
The Dow Jones Industrial Index changes its holdings. The antiquated index announced that it is removing three companies and adding three new companies to the index. Pfizer, Raytheon, and Exxon are getting the boot while Salesforce, Amgen, and Honeywell will replace them.
Market Outlook for September 2020
As we approach fall, many will be looking to see if a second wave of Covid-19 is coming and how bad it will be. If signs show that a more severe wave is in fact coming it could lead to further lockdowns. I and many others are hopeful that will not happen but it is a possibility.
The economy is slowly reopening throughout different states in the US. School is back in session and we have seen outbreaks, but nothing that the market hasn’t already priced in.
The next round of stimulus is still on the radar in September but I wouldn’t hold my breath. At this point, it seems it will be delayed until after the election or indefinitely. The market could react positively if talks begin and a stimulus is passed.
Unrest and tensions between some Americans may continue to escalate as we get closer to the election. This has had little effect on the market and is likely to remain that way.
There is a sense of compliancy among investors that doubt any significant pullback will happen before the election. While the Feds policies have driven a massive asset bubble it isn’t guaranteed that they can prevent the market from correcting. The S&P 500 is being carried by a couple of well-known stocks creating a bearish market breadth that cannot go on forever.
The stock market capitalization to GDP also known as the “Buffet Indicator,” compares the stock market’s value to the US gross domestic product. It’s commonly used to indicate if the market is undervalued or overvalued.
This indicator is currently at an all-time high, suggesting that stocks are more overvalued than the 2001 dotcom bubble. Yes, it’s very difficult to time the market, but now is probably not the best time to FOMO into stocks.
September could face more volatility and a larger number of down days compared to August. Be prepared for increasing uncertainty. I expect plenty of headline pumps about vaccine news, stimulus talks, and even trade talks.
A Complete Review of the ARK ETFs