Investors want to exit their stocks as they are afraid that a recession may snap the buying spree that American business owners are doing now.
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In two decades, the longest two weeks stretch of S&P 500 losses saw corporate insiders bottom fishing for stocks similar to how they had correctly called in the 2020 bear market bottom. On Monday, the value stock pickers were rewarded with a 2% jump on the optimism that the U.S. will lift tariffs on Chinese goods.
According to Washington Service Data, more than 1100 corporate executives purchased their own company’s shares in May as buyers exceeded sellers for the first time since March 2020, marking two years of the pandemic.
The spike in buying is because of investors pulling out cash from the equity funds. EPFR Global funds tracked six weeks of outflows, the longest withdrawals since 2019. In the meantime, strategists on Wall Street are rushing to downgrade stocks as they say that Federal Reserve Money tightening policy may risk dragging the economy into recession.
The success of any buyer buying on dips depends on how much faith they have in future earnings. If the predictions are correct, S&P 500 will earn $248 per share in 2023, and the index at this price will trade at a multiple of 16-time price to earnings, which is cheap by historical standards. The buying binge indicates that the directors and executives are confident that companies can deliver profit even after the Fed has braked the economy.
Craig Callahan, CEO of Icon advisors and who authored the book “Unloved Bull Markets,” believes that the company’s fundamental outlook is usually correct. According to him, investors function at the 30,000-foot macro-level for investment while company insiders function at the boots on the fundamental ground levels.
The insider buy-sell ratio had jumped in August 2015, preceding a market boom and coinciding with another in late 2018.
According to Bloomberg News, the buy-sell ratio has surged to 1.04 from 0.43 last month. Intel Corp. CEO Patrick Geisinger and Interim CEO of Starbucks Howard Schultz are among the corporate insiders who pick up their company stocks amid the market rout and falling S&P 500.
Monday’s bounce has many explanations ranging from JPMorgan Chase & Co’s upbeat forecast to charts showing that stocks have fallen too quickly. A month-end potential will allow fund managers to rebalance their equity bond allocation by buying stocks after the sell-off. The Friday expiry of options left market makers free to unwind their positions that were held earlier to hedge their derivatives positions.
Another theory points to last Friday’s options expiration, leaving market makers free to unwind short positions previously held to hedge their derivative transactions.
Whatever be the theories of reasons, the current sentiment points to lingering threats from Fed, renewed Covid lockdowns in China, and snarls in supply chains meaning tithe the worst is not yet over for stocks.
