As of this week, my Cabot Insider Edge portfolio was up 17.35% since inception on June 10, 2026, compared to 4.56% for the S&P 500 exchange-traded fund (SPY), despite the headwind of a cash position.
Six of the positions were up double digits. Three were up 25%-60%. All outperformed the market. There were no losers.
This is positive performance, and I’m happy to see my system for reading the insider buy signals remains effective. But I’m resisting exuberance, for two reasons.
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One is that it is always important to remain unemotional in the market – to the upside and the downside. Thinking with your emotions is the biggest thing that can get you into trouble in the markets, other than having a gambling addiction.
The other reason I am curbing my enthusiasm is that I remain somewhat cautious on the stock market. It appears to be vulnerable to a pullback for five reasons.
5 Reasons the Market Looks Vulnerable
1) There is fairly elevated sentiment, judging by market internals. This is a negative in the contrarian sense. It pays to do the opposite of the crowd in the market, and it is always imperative to be aware of what the crowd is thinking.
Market internals showing excess sentiment include the lack of investor interest in “safer” defensive and low-beta stocks. Others include the very wide and in one case near-historically wide deviation above trendline averages for stock prices and earnings.
Note that standard indicators like the Investor’s Intelligence Bull/Bear ratio are not yet at cautionary levels. That ratio recently came in at 3.62. It needs to be above four to warrant caution, in the contrarian sense. (Above five is a clear “move some money to cash” signal.) This reading tames my sentiment concerns slightly, but not much.
2) Signs of a slowdown may soon appear. For forward-looking economic insights, I often turn to economist and strategist Jim Paulsen. I have regularly talked markets with him since I met him back during the late 1990s tech bubble. At the end of 1999 he was just about the only one who was saying it was time to sell tech and move to bonds. Both calls were right on. He worked for a major Wall Street bank at the time. He now writes Paulsen Perspectives on Substack.
One of his tricks is to identify when forces that act with a lagged effect have been around long enough to start having an impact on growth. Right now, he thinks that is the case. He thinks we may soon see signs of economic weakness caused by the lagged effects of ongoing economic constraints like a strong dollar, rising rates, declining money supply and fiscal stimulus, and the flattening of the yield curve. Since most people are bullish, if he’s right, the signs of weakness will be a “surprise” that sparks selling, given that sentiment is so high. That selling will also be a “surprise,” so it will spark more selling.
3) Earnings growth momentum slowed in the second quarter. One data point does not make a meaningful trend here, notes Nick Raich of The Earnings Scout, who brought this change to my attention. For him, it takes two quarters of slowing momentum against continued stock gains to spell trouble for the stock market. But this is an early warning sign of potential trouble in earnings growth, a cornerstone of the current bull market enthusiasm.
4) The seasonally weak months of September and October lie just ahead.
5) Insider buying took a dive in the week ending August 21. Insiders bought only $61 million worth of stock. This is well below the pre-war weekly average for the year of $86 million. It was also a sharp decline from the prior two weeks’ worth of buying which came in at $180 million and $169 million. These data exclude beneficial owners (investors) to consider only what actual insiders were doing.
What to do with this information? I can’t predict a market decline. No one can. But these conditions suggest the market is vulnerable to weakness. This suggests it is better to avoid chasing stocks, to take profits more quickly if you trade, and to curtail the use of margin. I would not trim multiyear, long-term positions. This is not a call to “move to cash” ahead of a market decline which may not happen.
The good news is that insiders continue to buy stock, creating an ongoing shopping list of names for me to research. Whenever a meaningful insider purchase happens (meaningful because it has bullish characteristics like size, or because insiders buy in a cluster and so forth), I parachute down into the fray. Then I develop situational awareness to determine if the buying tells me the stock that insiders are purchasing is actually worth owning. Simply following insiders is not enough.
I just introduced three new insider buy stocks that fit the bill. Like my Cabot Insider Edge portfolio, which is currently up four times the market gains since inception, these names should outperform, in my view. To see these names, other stocks I have recently suggested, the full portfolio, and future suggestions, subscribe today.
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