There is a little-followed investment metric that investors should pay more attention to. This metric, the Insider Transactions Ratio, tracks the trading volume of company insiders (officer, director or owner of 10% or more of a class of a company’s stock).
The ratio compares the volume of stock sales vs. buys by corporate insiders. A ratio of 12:1 or under is considered bullish with a ratio over 20:1 considered bearish.
Why is the Insider Transactions Ratio important?
Because if insiders are bearish on the stock market, shouldn’t the rest of the investing public be leery as well?
What does the Insider Transactions Ratio have to say about the recent stock market?
That the insiders haven’t been this bearish about the stock market in over a year. If 20:1 is bearish, should we be concerned that the ratio hit over 140:1 in April?
The Insider Transactions Ratio is just one metric that should raise alarms about the stock market. The Price:Earnings Ratio (PE Ratio) is also raising red flags.
The PE Ratio, which measures a stock’s price compared to its earnings is a good measure of whether a stock is overvalued and whether a stock’s price is tracking economic performance or if it’s being inflated by something else. Historically, the average PE Ratio of the S&P has hovered around 16:1. Currently, it sits around 42:1.
Why should a ratio of 42:1 alarm investors?
During the height of the dot-com bubble the PE ratio peaked at 34:1. The current stock market is currently trading higher than during the dot-com bubble! What this says about the stock market is that investors are over-speculating and at some point the chickens will come home to roost.
Rampant speculation is not only happening in the stock market. Investors with a penchant for high-risk have also driven up the price of Bitcoin to record highs.
Some investors aren’t waiting for the bubble to burst. They’ve been preparing since before the COVID-induced pandemic. Savvy investors were already preparing for a downturn – they just didn’t know where it was coming from. In 2021, these investors have batten down the hatches even more.
What are they doing to shield themselves and what can the rest of us learn from their habits and movements?
In a nutshell, ultra-wealthy savvy investors are shielding themselves from a crash by distancing themselves from the public markets.
This is how they’re shielding themselves:
- Go Private. Smart investors are allocating to private investments such as real estate and private equity that are shielded from Wall Street volatility.
- Invest In What You Can Touch And Feel. Tangible assets like real estate and businesses typically cash-flow and grow over time. This double threat of investment returns are ideal for not only insulating income during downturns but also for compounding returns over time.
- Think Long-Term. By expanding their investment horizons out beyond five or more years, savvy investors are able to leverage the long-term stability of tangible assets that iron out any short-term dips. Thinking long-term provides the peace of mind of knowing that short-term volatility smooths out over the long-term.
1 – In the face of economic threats, savvy investors double down on their diversification strategies.
2 – They allocate to multiple asset classes, look beyond local geographic markets (even looking offshore) and will expand the types of securities they’ll place capital in beyond equity (debt is currently a popular choice). Investing across asset classes, geographic locations and investment vehicles ensure continuous income in a downturn.
3 – Even if one or more investments dip with the broader economy, the remaining assets in the portfolio should be able to pick up the slack.
Multiple investment metrics including the Insider Transactions and PE Ratios are sounding the alarm on the stock market.
Are you heeding the alarms?
Are you prepared?
It’s never too late until it’s too late. As of today, the bubble hasn’t burst yet so there’s still time to take shelter.