Investor sentiment remains quite elevated. This makes the market vulnerable to pullbacks – in the contrarian sense.
Meanwhile, insiders are cautious. They are not buying much stock relative to how much they are selling.
These two factors tell us that more bouts of market weakness lie ahead. That’s the bad news, for bulls.
The good news is that in the current market dynamic, insiders are stepping up to buy when selling gets particularly intense. Not only that, but they are buying the kinds of companies that do well when there’s economic growth. Thus, insiders are predicting we won’t see a recession – the typical factor that causes bear markets.
Here is more detail on this dynamic and five stocks that insiders especially liked in market weakness last week.
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* Sentiment. The Investors Intelligence Bull/Bear ratio came in at 4.13 on February 11. That is extremely high. Generally, the way I used this indicator, any reading above four is a signal to turn cautious. This sentiment signal rarely stays this high for too long. The same thing always knocks it down: Market weakness caused by elevated fear among investors sparked by some development. Any development. It doesn’t really matter what.
* Insiders. The insider buy/sell ratio has fallen to levels that historically demonstrate significant insider caution. A cautious state among insiders can last for a long time. This is not a good timing signal. But combined with the elevated investor sentiment, it spells trouble for stocks.
The good news is that in the current environment, when enough trouble (market weakness) develops, insiders step in to do some surgical buying.
* Focusing on the larger, more meaningful buys, actual insiders invested over $15 million at two dozen companies in the temporary but sharp pullback last week. That was a sizeable increase compared to prior weeks.
Their buying was concentrated in cyclical areas like industrials, chemicals, electrical components and consumer-facing companies. This tells us they do not sense a recession is coming, despite some signs that this could play out – like the weak jobs market.
* Investors considered insiders because of large holdings (10% owners), put $140 million into their holdings last week, also a relatively large amount. This so-called “beneficial owner” insider buying is less meaningful than actual insider buying. But it is still telling. Often, large owners are more than just technically insider buyers, because they also hold directorships.
To sum up: Be psychologically prepared for more dips. But given their recent behavior, you should also expect that insiders will step up to buy these dips, as they did briefly last week. This suggests that you should do the same.
To get you started, here is a short list of cyclical names where insiders bought aggressively last week, in the pullback. I’d suggest waiting for further market weakness to take these stocks back down closer to where insiders bought, to venture in yourself.
The rebound from the April lows last year was fairly quick and steady. That was an “instant gratification” market. This is more of a “patience” market now. Be patient and wait for opportunities in the stocks you like. Here’s a starter list of names to consider because insiders like them.
5 Stocks Insiders Bought During the Latest Market Weakness
Johnson Controls (JC)
A director bought $1 million worth at 132 in this company, which sells products used in residential and industrial construction.
International Paper (IP)
The CEO and a director recently bought $3 million worth of stock at 40 to 40.37 a share at this paper packaging company.
Cavco Industries (CVCO)
The CEO and two directors bought $860,000 worth at 462 to 500 in this manufactured home company.
Standex International (SXI)
A director bought $490,000 worth at 245 in this manufacturer serving the electronics, aerospace, defense, energy and pharmaceutical sectors.
Crane (CR)
The CEO and a few directors bought $950,000 worth at 178 to 184 in this manufacturing company serving the aerospace, electronics and industrial sectors.
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