Individual investors are moving in. And the smart money is moving out.
With the Dow Jones Industrial Average pushing past 14,000, individual investors jumped back into the stock market, it looked like happy days were here again. But were they really?
When average investors are pouring money into the market, it’s a sign that a correction, or even a bear market, is coming. Likewise, when corporate insiders are selling their shares, look out below.
Individual investors have pulled more than $150 billion out of U.S. stock mutual funds since 2009, but they were coming back in January with a net investment of $10.3 billion. Include exchange-traded funds and a record $77.4 billion was invested in January, according to TrimTabs Research.
Conversely, there were more than nine insider sales for every buy last week, among insiders whose stocks are listed on the New York Stock Exchange.
“Insiders are waving the cautionary flag in an increasingly aggressive manner,” according to David Coleman of the Vickers Weekly Insider.
Executives have not sold their company’s stock this aggressively since early 2012 – just before the S&P 500 corrected by 10 percent to its low for the year. You may recall the chart we ran in last week’s post, which showed that this year’s market has been almost identical to last year’s market. We could continue to follow the same path.
Fourth Quarter Earnings
Of course, we’ve all heard that the economy is improving … with improvement in the housing market, stronger economic growth and lower unemployment are just ahead, right?
Well, not so fast.
Initial forecasts predicted that fourth quarter earnings would reflect the economic growth that’s allegedly been taking place. Instead, fourth quarter earnings were down 1% from the fourth quarter of 2011 – and 8% lower than had been forecast.
Maybe the economy really is shrinking, as we wrote last week.
So what about the recent market gains?
As Zerohedge noted, just 10 companies contributed more than 90% to the S&P 500’s upside in aggregate earnings. Microsoft (MSFT) and JP Morgan (JPM) accounts for half of the beat.
Individual investors pulled out of the market in droves just as the market was recovering for the 2008 bear market. Now they’re jumping back in. Join them at your own risk.