Investor enthusiasm for U.S. stocks is high: The S&P 500 has soared, posting its best nine-month performance since 1997.

However, some of the most informed investors do not seem to be so optimistic.

Corporate insiders have been reluctant to snap up their companies' stock. According to InsiderSentiment.com, only 15.7% of all U.S. companies with executives or directors making stock trades reported net purchases of company stock in July. That's the lowest level in the past 10 years. That number rose to 25.7% in August and fell to 21.9% in September, well below the 10-year average of 26.3%.

The percentage of U.S. corporate executives or directors buying company stock is well below the 10-year average

Those who follow corporate insider sentiment believe that the trades of company executives and directors should be well informed about the prospects of their own businesses, and that they can collectively provide a signal about the future performance of the overall market. In recent months, however, that signal has not been positive.

“Insider trading is a very strong predictor of future total stock returns,” said Nejat Seyhun, a professor at the University of Michigan’s Ross School of Business. “And the fact that it’s below average suggests that future stock returns will also be below average.”

Seehorn, who advises InsiderSentiment.com, said he believes corporate insiders are worried about a recession, which typically causes stock prices to fall sharply. While economic data generally looks good, with inflation cooling and consumer confidence improving, unemployment rose earlier this year and there are signs of stress among low-income consumers.

Stocks have moved sharply higher so far in 2024, and have always recovered quickly from any pullbacks. A rally in tech stocks that could profit from the artificial intelligence boom has morphed into a broader trend as many investors become increasingly confident that the Federal Reserve has controlled inflation without causing much economic damage. The S&P 500 is up 21% so far this year, setting 43 record closes along the way.

S&P 500 Year-to-Date Performance

JPMorgan Chase Chairman and CEO Jamie Dimon is a well-known Wall Street executive who has also warned that the economic road ahead may be much more difficult than many investors believe. In May, Dimon said he was cautiously pessimistic about the risks facing the global economy and believed that JPMorgan Chase's stock price was too high.

Investors will be watching for bank executives' views on the economy when earnings season kicks off in earnest later this week, with JPMorgan Chase, Wells Fargo and Bank of New York Mellon reporting first on Friday, followed by Bank of America and Goldman Sachs on Oct. 15.

Some investors believe that insider selling of company stock is not a valid indicator. They say shareholders may sell shares to diversify their portfolios or free up cash, rather than because they have a negative view on the stock.

Stock selling aside, surveys show that corporate insiders have been less enthusiastic about buying stocks lately. Executives and directors of U.S. public companies bought $2.3 billion of company stock through September this year, the lowest amount for the same period since 2014, according to the Washington Service. Last year, they bought $3 billion in the first nine months.

Amount of stock purchases by corporate insiders

During the coronavirus-fueled sell-off in early 2020, corporate insiders rushed to buy shares, purchasing nearly $1.3 billion in March alone. Some investors saw that as a reassuring sign.

“Insider buying gives us the confidence to put money to work in the stock market during an extremely challenging time,” said Eric Diton, president and managing director of Wealth Alliance.

This year, the largest insider sales were by executives of large technology companies.

Amazon founder and CEO Jeff Bezos has sold about $10.3 billion worth of stock this year, while Dell Technologies chairman and CEO Michael Dell has cashed out $5.6 billion, and Meta platform founder, chairman and CEO Mark Zuckerberg has cashed out $2.1 billion. The stock prices of all three companies have risen by double-digit percentages this year.

Palantir Technologies Chairman Peter Thiel and Nvidia CEO Jensen Huang were also among the tech executives selling shares. Shares of both companies more than doubled in 2024.

Another development that has some observers wondering about the market's outlook: One prominent investor is hoarding cash.

The latest SEC filings show that Buffett's Berkshire Hathaway has recently sold off shares and significantly cut its Apple holdings. As of the end of June, the Omaha, Nebraska-based company's cash reserves had increased to $276.94 billion.

“Investors should take notice,” said David Harden, CEO and chief investment officer of Summit Global Investments. “I don’t think he’s trying to time the market and look for pullbacks to buy. He’s probably saying, ‘This is overvalued, I prefer cash over this investment.’”

Article forwarded from: Jinshi Data