These factors suggest that near-term caution is advisable.
Smart traders know that markets rarely go up or down in a straight line. The sharp upturn that began with a Feb. 11 intra-day reversal has attracted a lot of momentum players.
Company officers and directors, when investing their own money in the firms they know best, are the opposite of relative strength traders. They tend to be bargain hunters. The Thomson Reuters Insider Transaction Ratio tracks real money, open market actions. It provides an excellent short-term (weeks to months) gauge of where the market might be headed.
The signals were correctly bullish near last August’s and September’s nadirs, when the public was busy panic-selling. It also correctly foretold the nice two-week rally from mid-November to early December 2015. More recently the indicator went wildly positive just as stocks bottomed in January and February of this year.
As of April 15, though, insider trading has sharply reversed course. Last week’s sell to buy ratio weighed in at 36x, three times more than even the upper limit of what is considered bullish. It represents the most negative reading since April 2015 and where it sat near the end of October 2015.
Both those times proved to be good periods to be lightening up and raising cash.
Stocks don’t always drop immediately when insider activity looks like this, but most of the time, risk has exceeded potential reward in the weeks to come.
Watching the S&P 500's movement versus its 50-day moving average provides a different way to view the action. The chart below shows the index along with a view of where it stood, measured in standard deviations above or below its trailing 12-month range.
All three "best buying opportunities" came when frenzied sellers pushed the SPY into the green zone (two standard deviations below normal) or even lower. In the 12 months concluded March 31, shortly after the SPY broke north of two standard deviations from average, the market stalled or collapsed.
Based on this, the immeidate future didn't appear bright as of the end of March reading. Stocks then unsurprisingly sold off through April 12 before turning higher over the last three trading days.
That mid-April rally has this indicator stuck solidly in bearish territory, in harmony with the insider traders’ viewpoint.
Yet another technical sign points to near-term danger. Option buyers have terrible track records when it comes to market timing. They generally purchase protective, or speculative, put options only after major declines.
High levels of put buying translates into expansions of the equity-only put/call ratio. They occur when fear is peaking. Note the inverse correlation with the S&P 500 on the chart below. When stocks have surged, traders yield to greed, complacency kicks in and the put-call ratio dips.
The April 15 reading is down to a level seen just before the substantial sell-offs in the second half of 2015, which extended into the worst start to any year in history.
Most blue-chip stocks have had big runs. Valuations are extended by historical standards. All three of the indicators profiled here suggest those lucky enough to have ridden the wave higher should consider locking in some gains. Those who missed the rally might do well to wait for a better entry point.
Disclosure: No positions in any index products.
