Buckle Up
They giveth and then they taketh. As we reported last month, insiders jumped into June with both feet. In what turned out to be a prescient endorsement, insider sentiment reached a fever pitch toward the latter half of May/beginning of June.
At that point, the market rally was historically narrow with just the top 5 stocks in the S&P 500 index accounting for an astonishing 96% of the year-to-date gains (article) – well north of their fair share.
However, that narrow focus broke in June. For the month, the S&P 500 Total Return Index rallied +6.6% and this time the market move benefited more than just the tech titans that round out the top ranks of the market index (Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Nvidia (NVDA) and Tesla (TSLA)).
We note that the breadth of the market rally matched the unusual breadth of insider activity that we observed and reported on coming into the month (Seeking Alpha).
Today, insider enthusiasm has all but evaporated. As we leave the June rally behind and look to July, the CDT Insider Sentiment Ratio is warning of less friendly skies ahead with the measure below the 25th percentile.
The poor sentiment is particularly ominous given the timing of the drought which is just days away from the start of the summer earnings season (please note that our measure seasonally adjusts for earnings blackout periods).
In part, we believe that insider trepidation likely stems from valuation. Currently, as a whole, the market is trading at 21-22x estimated 2023 earnings, which is on the high side of history.
While at the same time, an ever-increasing interest rate environment is challenging the attractiveness of equities – the 2-year note jumped above 5% today. This tenuous dynamic is likely why insiders have been keen to buy the dips and avoid the rallies.
Expect some turbulence ahead.
How it Works
Objective:
Predictive model that measures the historical relationship between insider sentiment and the future probability of downside volatility (risk).
Insider Trading Activity:
Purchase activity of an insider’s own stock filtered by proprietary parameters to scrub noisy data.
Insight:
Executive-level insider sentiment is an indicator of near-term financial market risk.
– Low executive sentiment suggests a high level of risk
– High executive sentiment suggests a low level of risk
Scale: A ratio of current insider trading activity in relation to historical patterns
– (0 to ∞) with a historical median measure of 1
– Below 1 implies an above normal level of risk
– Above 1 implies a below normal level of risk
Frequency:
The measure is updated daily and historically been subject to swift and possibly extreme shifts.
*This webpage is updated monthly and provides just a snapshot of the most recent month-end.
Disclosures
This presentation does not constitute investment advice or a recommendation. The publisher of this report, CDT Capital Management, LLC (“CDT”) is not a registered investment advisor. Additionally, the presentation does not constitute an offer to sell nor the solicitation of an offer to buy interests in CDT’s advised fund, CDT Capital VNAV, LLC (“The Fund”) or related entities and may not be relied upon in connection with the purchase or sale of any security. Any offer or solicitation of an offer to buy an interest in the Fund or related entities will only be made by means of delivery of a detailed Term Sheet, Amended and Restated Limited Liability Company Agreement and Subscription Agreement, which collectively contain a description of the material terms (including, without limitation, risk factors, conflicts of interest and fees and charges) relating to such investment and only in those jurisdictions where permitted by applicable law. You are cautioned against using this information as the basis for making a decision to purchase any security.
Certain information, opinions and statistical data relating to the industry and general market trends and conditions contained in this presentation were obtained or derived from third-party sources believed to be reliable, but CDT or related entities make any representation that such information is accurate or complete. You should not rely on this presentation as the basis upon which to make any investment decision. To the extent that you rely on this presentation in connection with any investment decision, you do so at your own risk. This presentation does not purport to be complete on any topic addressed. The information in this presentation is provided to you as of the date(s) indicated, and CDT intends to update the information after its distribution, even in the event that the information becomes materially inaccurate. Certain information contained in this presentation includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results, and such differences may be material.
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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