Is The Market Laying A Bull Trap? Rising Bond Yields And Insider Sales Signal Caution

U.S. stock markets have moved strongly higher in 2024, supported by the absence of a much-anticipated recession and the effects of interest rate cuts by the Federal Reserve. Stock markets reacted enthusiastically to the election of Donald Trump by posting very strong gains in November.

However, not everyone has the same sanguine view of the future. Yields in the U.S. bond market have risen significantly since mid-September, suggesting that markets anticipate that Trump’s pledge to impose substantial trade tariffs and mass deportations will provoke a resurgence in inflation, which will cause interest rates to rise.

Another sector that is exhibiting a more circumspect view of the future is corporate insiders, as the accompanying chart illustrates.

The ratio of insider sales versus purchases has reached an all-time high and has been rising steadily through 2024. Some of the rise in insider sales can be attributed to the strong U.S. stock markets of the past couple of years which has produced substantial paper profits that some may wish to realize. However, historically elevated levels of insider selling have proven to be a reliable indicator of difficult times for corporate earnings ahead that are often associated with weaker stock markets. The relevancy of corporate insider buying/selling derives from the privileged vantage point they occupy in assessing the earnings prospects of their respective firms. This measure provides a useful window into the economic prospects ahead.

The combination of the caution being displayed by the bond market, the aggressive selling by insiders, and the extreme level of bullish sentiment (which often precedes market turns) in stocks suggest to us that this is a time for investors to exercise caution.

How long a bull market will last is uncertain, but what is certain is that it will eventually end. While we’re happy to participate in bull market moves in all markets, we also advocate being alert for evidence of trend changes and the use of risk management techniques to preserve accrued profits and limit losses.

The prospect of trade wars, isolationism and a host of other potential catalysts for volatility will make the balance of the decade a challenging time for investors. While the volatility we anticipate will create considerable risks, we are excited at the tremendous risk/reward opportunities such volatility produces.

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