Selling Everything - The Next Crash Is Coming

What's up, Graham? It's guys here. So, you know the saying, "Buy Low, Sell High." Well, apparently, while retail traders were celebrating the stock market's best month since 2020, corporate insiders have been selling their stock at the fastest pace since January, sending the signal that maybe we're about to see another drop. After all, insider transactions have successfully predicted the market peak in 2008 and the market bottom in 2009. They sold in late 2019 before buying again in March of 2020, and after dumping a large portion of shares in January, they're back at it again, selling even more shares now that prices have recovered.

Not to mention, most people have no idea that insider transactions are public information, and how this could be used as a crystal ball to predict the future. So, we have a detailed look into exactly what corporate insiders are selling, what this indicates for the future of the stock market, and whether they believe this is another bear market rally while Michael Burry taunts us with an "I told you so." Although, before we start, if you appreciate all the research that goes into making a video like this, while I stay up way past my bedtime staring at a computer screen, it would mean a lot to me if you hit the like button or subscribed if you haven't done that already. Doing that takes a split second; it helps out the YouTube algorithm tremendously. And as a thank you, here’s a picture of me holding a like button holding a picture of the like button holding a picture of the like button holding a picture of the like button. So, thanks so much, and now let's begin.

So, first, for those unfamiliar with insider transactions, here's everything you need to know about exactly how it works, because despite what you might think, all of this information is completely legal if you know where to look. And it all begins here. To start, most people think of this in regards to insider trading, where a person buys or sells a stock based on non-public private information. Of course, that's highly illegal, and anyone who gets caught could face jail time. Although in 2000, the SEC made an exception known as the 10b51 plan, which allows for company insiders to buy and sell their own stock as long as no private information was used as the basis for the trade.

Under this protection, those who own more than 10% of the company's stock or employees who have inside knowledge of company activity could freely buy and sell their own shares, as long as it's reported for public disclosure. This ensures that very specific rules are followed, and it also gives us the ability to see exactly what and when they're buying or selling. Now, it's important to mention that executives buy and sell their own stock all the time for a variety of reasons. Sometimes they'll buy if they're bullish about the company long term, or as part of a compensation package. Other times, they'll sell for an innocent enough reason, such as wanting to diversify their holdings.

In this case, the 10b51 plan aims to clarify any misinterpretations so that investors know exactly what to expect and don't panic because all of a sudden, Elon Musk sells 10% of his stock at the peak of the market—coincidence? Either way, a few small transactions here and there are not going to make a big difference, but when you start to see a lot of insider buying and selling all at once, it starts to make you think: are they onto something? And their performance so far has been rather telling. Well, like I mentioned, so far on the surface, insiders have a history of being right.

Throughout the last eight years in technology, you could see that insider selling happens to occur about six months before a drop. The same applies to consumer staples and communication services, and since 1992, they've correctly predicted the next rally, even buying up the bottom just a month ago. So, now that they're selling again, does this mean we're about to see another drop coming soon to a market near you? Sounded better in my head, but I digress.

Anyway, this data is very surprising, all thanks to the blog Market Sentiment, who I'll link to down below in the description for anyone who wants to follow along because their research is absolutely incredible. They analyzed more than 4,000 insider transactions over $100,000 over four years, and then benchmarked those returns against the S&P 500 over a week, a month, three months, six months, and a year. The most shocking from all of this is that throughout every single time period, they outperform the market. If you extrapolated that throughout the entire year, that would result in an almost 20% higher return than the S&P 500.

However, that's not the entire picture because even though insider transactions have outperformed the market, a number of those trades don't. So, in order to match that performance, you would have to buy or sell the entire market all at once, which seems to be happening right now. But before we go into the reason why insiders are selling the rally, it's important to determine just how accurate this information tends to be. After all, who cares if they're only right a few times if they could be wrong the rest? Thankfully, though, one of the largest studies on exactly this was done in 1986 across 60,000 transactions over a six-year time frame.

This study found and confirmed that insiders purchase stock prior to abnormal rises in stock prices and sold stock prior to abnormal declines in stock prices. A later study throughout the 1990s and 2000s also concluded that insiders are contrarian investors and can time the market better than a simple contrarian strategy. Now, even though this is mainly found to be true among smaller companies, research in 2011 found that high conviction insider purchases generated an average 12-month excess return of almost 221%, while medium and low conviction purchases almost had no upside. In other words, when insiders buy and sell stock on a large scale, they tend to be right, at least in the short term.

The best way to find these signals is what's known as cluster buying. This is where individuals all buy or sell around the exact same time, and a 2017 study found that this was usually the most predictable signal for future stock market growth or an impending decline, similar to what we saw back in March of 2020. Although, in terms of what's happening now, there's a lot of skepticism in regards to the recent S&P 500 price increase, leading insiders to sell at a rate not last seen since January, and the fear that a lot of people worry about a bear market rally.

This is a term that refers to a stock market increase of more than five percent in the middle of an even larger downtrend, and during bear markets, it's incredibly common. In fact, Investopedia notes that every bear market between 1901 and 2015 spawned at least one five percent rally, and rallies of 10% or more interrupted 2/3 of the 21 bear markets over that span. Basically, our current market is performing right alongside with history. It's also noted that the deeper the decline, the higher the rally. For example, in 1929, the Dow Jones increased by 48% before then falling 86% to a brand new bottom.

The dot-com crash also had eight bear market rallies of at least 18% and four gains of 30% before then dropping even further. The same was also found throughout the 2008 Great Financial Crisis, which saw nine bear market rallies between 6% and 24% before eventually bottoming out after two years. Even worse, had you collectively sold at the bottom and bought at the top, you would have lost 80%. Looking at you, Wall Street bets.

So, of course, the obvious question then becomes, "But Grant, how do we know if it's a bull market or just a bear market rally?" But I digress. In terms of starting a brand new bull market, this would be categorized by a 20% gain from the low for a sustained period of time. Although others argue that it could be 30% for an excess of 50 days, but regardless of the exact metric, a bear market rally only tends to last days or sometimes even weeks, and you won't know about it until it's too late.

In terms of what this means for you, Morningstar mentions that bear markets that coincide with recessions tend to decline nearly 35% on average and last for 15.3 months, of which we've already seen a 35% drop in the NASDAQ. Of course, if our economy continues to contract, then yes, we could see more pain ahead. But if there's no official recession, based on prior history, stocks decline an average of 25% in a non-recessionary bear market over nine months, and over the last 50 years, the average decline has been 18% over 6.8 months, which is exactly what we're seeing now.

All of that is to say that even though insiders are selling more shares than they're buying, it could be a signal that the market is about to see another drop, and that they know something that we don't, or they could be worried about slowing demand through downsizing. It makes sense to take some chips off the table now that prices have started to recover; this would allow them to be in a better financial position should inflation continue to be an issue. But regardless, there's not a one-size-fits-all approach that's a hundred percent right in terms of what we might end up seeing.

That's why the best strategy continues to be, drumroll yet again, continuing to dollar-cost average into the markets on a regular basis, regardless of where it trades. That way, you're not going to get ahead of yourself and think the worst is over, so I'm going to YOLO everything I have right now into SoFi stock and make more money than I ever thought was imaginable. But you also won't be selling everything at a time when potentially we could be entering a new bull market and rising back near all-time highs.

In terms of my own thoughts on this, for whatever that's worth as a random guy on YouTube, I think there is some merit to looking at overall investor sentiment with their transactions, and it gives us a good indication of the market's trajectory. But I don't think it's worth the risk of following too closely, and I do your own research because this is certainly not financial advice and it's for entertainment purposes only. So, with that said, you guys, thank you so much for watching! Also, feel free to add me on Instagram. Thank you so much, and until next time!