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“ I’ve tracked insider activity on a daily basis for more than two decades and I have rarely seen such a dearth of ‘actionable’ insider buying. ”
Investors and traders take warning. The market looks vulnerable to a pullback. That’s the message from corporate insiders’ trading activity. So far this year they’re buying less and selling more of their own company shares — particularly in tech.
“The cautionary signals are off the charts,” says Richard Cuneo, who tracks insider activity at Vickers Insider Weekly published by Argus Research Group.
This is troubling sign not only for tech but for the U.S. stock market overall, since tech is responsible for virtually all of the S&P 500’s
SPX
gain so far this year. The upshot: If tech stocks correct that’ll take down the market. This could darken overall investor sentiment, among index investors for example, compounding the selling pressure.
There are three main problems now for stock market bulls.
1. Insiders are on a buyers’ strike: Insider buying normally dries up during earnings season because of company-imposed trading restrictions. However, insider buying right now is particularly light. I’ve tracked insider activity on a daily basis for more than two decades and I have rarely seen such a dearth of “actionable” insider buying. This means purchases that look particularly attractive because of bullish qualities like cluster patterns and superior insider records for timing.
2. Insider selling has ramped up dramatically in tech: Insiders are taking profits into the big tech gains last year and so far this year. They might be expressing skepticism about an artificial intelligence (AI) bubble, Cuneo says. Last week the Vickers Insider Weekly one week sell/buy ratio was extremely elevated at 8.46 for Nasdaq issues, confirming a month-long trend. For context, this gauge is bearish above 2.5 and bullish below 2. The week before last it was at 9.8, and the two weeks before that it was at 7.
“So, we are now officially concerned,” Cuneo adds. This “disturbingly high” ratio “represents a clear inclination to take some money off the table after the 45% gain in the Nasdaq in 2023,” he says.
3. Insiders cast some doubt on continued growth: Insiders are selling cyclicals the most, and focusing buying on defensive names, according to Vickers Insider Weekly. This can be read as a cautionary statement about the economy. Beyond tech, the next biggest sectors for selling are all cyclical. That means the fates of companies are linked to economic trends. There’s strong selling in the consumer discretionary, financials, and materials sectors. The strongest buying is in communications services, health care and energy. The first two are largely defensive sectors.
Downside volatility ahead
“It’s better to buy weakness rather than chase stocks at this point, especially in tech. ”
My interpretation is that insiders are suggesting to investors that there could be downside volatility ahead. That means it’s better to buy weakness rather than chase stocks at this point, especially in tech. If insiders are right, we will probably see more of a correction than a new bear market: Inflation has been tamed which will bring Fed rate cutting, and a recession is unlikely. Technical analysts at Argus also think it may be time for a reset as part of an advancing bull market, Cuneo says, adding, “Maybe it has just gone a little too far too fast.”
‘Magnificent Seven’ insiders are mostly holding
Other than Meta Platforms
META,
and Nvidia
NVDA,
which have seen $197 million and $52 million, respectively, in selling so far this year, there’s been light- to zero insider selling at the rest of Magnificent Seven names in the past 30 days, meaning Apple
AAPL,
Amazon.com
AMZN,
Alphabet
GOOGL,
Microsoft
MSFT,
and Tesla
TSLA,
In fact, tech sales and earnings growth have been so strong, the sector arguably is still attractive and reasonably valued. “The fundamentals have been fantastic in these names, and they have earned their way to higher valuations in a lot of cases,” says Scott Opsal a value investor who is the research director at Leuthold Group. While Microsoft and Apple are in the top decile of their historical valuations, many other tech companies “are growing income so much that their valuations are fairly modest,” he says.
It’s also worth noting that stock markets can move higher even when insiders are cautious. Also consider that the Vickers insider sell/buy ratio reads neutral for New York Stock Exchange issues. “It is fair to say there is very cautious insider sentiment on the Nasdaq, but very benign sentiment from insiders on the New York Stock exchange, where there is nothing of concern,” Cuneo says.
Read: Too much ‘Magnificent Seven’? A revenue-weighted index fund may be the solution.
Least-liked stocks
Here are the tech stocks that are “least liked” by the Vickers Insider Weekly interpretation of insider selling trends. Below you’ll find the amount insiders sold at these companies in the past 30 days. The relative valuations by forward p/e and price to sales are comped against the trailing five-year averages. Note the mixed read on valuations. They don’t all look overvalued compared to their histories, confirming Opsal’s point that a lot of tech companies have grown into their valuations.
Meta Platforms
Business: Social media
Insiders sold: $197.1 million
Relative valuation: Meta’s 23 forward p/e is 4% above its five-year average and its 6.8 price to sales ratio is 9% above.
Atlassian Corporation
TEAM,
Business: Workforce management software
Insiders sold: $65 million
Relative valuation: Atlassian’s 101 forward p/e is 4% above its five-year average and its 10.3 price to sales ratio is at a 21% discount.
Salesforce
CRM,
Business: Customer relationship management platforms
Insiders sold: $239.6 million
Relative valuation: Salesforce’s 30 forward p/e is 40% above its five-year average and its 7.9 price to sales ratio is at a 5% discount.
Cloudflare
NET,
Business: Cloud services provider
Insiders sold: $28.9 million
Relative valuation: Cloudflare’s 155 forward p/e is at a 55% premium to its trailing average and its 20 price-to-sales ratio is at a 12% premium.
Samsara
IOT,
Business: Internet of things and cloud software
Insiders sold: $26.1 million
Relative valuation: As a relatively new company Samsara does not have an extensive earnings history to analyze, but its price-to-sales ratio of 7 is 83% above the trailing average of 3.9.
Arista Networks
ANET,
Business: Cloud software and hardware
Insiders sold: $36.4 million
Relative valuation: Arista Networks’ 37.6 forward p/e is 30% above the trailing five-year average and its 14.7 price-to-sales ratio is 49% above its average.
Insider favorites
There’s been strong buying in the following names: Texas Pacific Land
TPL,
an oil and gas royalty company; Madrigal Pharmaceuticals
MDGL,
which is developing therapies for liver ailments; Howard Hughes Holdings
HHH,
in real estate; Asana
ASAN,
in workforce management software; BlackRock Innovation & Growth Term Trust
BIGZ,
which is a smidcap closed-end fund that trades significantly below its net asset value, and Staar Surgical
STAA,
which sells implantable lenses and surgical equipment.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned META, NVDA, AAPL, AMZN, GOOGL, MSFT, TSLA, TPL, MDGL, ASAN, BIGZ and STAA. Brush has suggested META, NVDA, AAPL, AMZN, GOOGL, MSFT, TSLA, TPL, MDGL, HHH, ASAN, BIGZ and STAA in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
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