Let the good times roll! As I write this article, the S&P 500 Index is at 1068.22, up 55.91% in absolute terms since the trough on March 9, 2009. Investor and consumer sentiment seems to be climbing according to polls and news headlines. In fact, if you somehow avoided the news since last October 7th, your S&P 500 investments would be even. However, signs abound that we could be in the midst of a “sucker’s” rally- universally defined as unsustainable…
Insider Movement
Corporate insiders are officers in a company (usually from the director level on up) who have access to non-public information. Since they have access to
- Real or Sucker’s Rally? (Ana Bernardo)
information that hasn’t yet been digested by the market, they are in a position to profit from that information by selling (or buying) their company’s securities before news is disseminated. Of course, this practice is illegal. As that link makes clear, outside investors with access to this information also are in danger of violating insider trading laws.
Of course, all investors need a chance to sell. In many companies, there are certain ‘windows’ of time where officers have the opportunity to sell or purchase more stock. These windows are often times chosen to oppose earnings releases, investor conference calls, and other news generating events. The idea is to allow officers to sell when they don’t have any non-public information.
Few are naive enough to believe that officers have no advantage, even with the careful management by their company’s lawyers. That’s why officers also have to file their security transactions with the SEC when they make moves in the market. This allows a better paper trail in case officers try to pull a fast one before a news making event. It also means other investors can see when insiders are buying and selling. In recent weeks, insiders have been selling, heavily. This sets up an interesting situation where the people with the most information are selling into a broader market rally. In fact, they are doing so at a rate of 6.31 shares sold to every 1 bought. This could signal bad news coming down the road for the market in general…
Junk Rally?
As a recent article in Smart Money points out, individual investors seem to have been left in the dust in the rally since March. From the article: never before has the market rallied 60% in 6 months, and never before has it done so while the broader economy shed 2.5 million jobs (In March, headline unemployment was at 8.5%). It’s possible that the main beneficiaries of the rally have been institutional investors, and instead of buying on improving fundamentals, program trading and short covering is responsible for lots of the improvement. Crazy market action in stocks like Citi C and AIG AIG seem to back up that hypothesis, as the price of those stocks has become unglued from any fundamentals.
Still, when you pay for value oyu get value. There are surely pockets of undervalued securities out there. The issue is the market as an aggregate may have risen too quickly. What do you think? Is this rally sustainable?
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