Insider buying evaporates with S&P 500 poised for fresh record

The lack of interest among executives may be a warning signal for investors who just saw analyst estimates for third-quarter profits turn negative. Photo / Getty Images

Investors who scored big gains by swooping in at the bottom of the last two US equity selloffs now are backing away from the market.

The number of officers and directors of companies purchasing their own stock tumbled 44 per cent from a year ago to 316 in July, the lowest monthly total ever, according to data compiled by The Washington Service and Bloomberg that goes back to 1988. With 1,399 executives unloading stock, sellers outnumbered buyers at a rate that was exceeded only two other times.

While companies themselves keep buying back shares, demand from their highest-ranking employees has dried up as the S&P 500 Index climbed to fresh highs after going for more than a year without surpassing its previous peak. The benchmark measure rose 0.5 percent to 2,185.94 at 12:44 pm in New York, above its August 5 all-time closing high of 2,182.87.

The lack of interest among executives may be a warning signal for investors who just saw analyst estimates for third-quarter profits turn negative even as equity valuations swell to levels not seen since the aftermath of the dot-com bubble.

While stocks have brushed aside the worst earnings decline since 2009, staging five consecutive monthly gains, the reluctance to buy is a departure from February and last August, when insiders rushed to scoop up shares during two brutal selloffs.

"It's people who are looking at the fundamentals of their business every day and seeing a picture that's deteriorating," said James Abate, who helps oversee $1 billion as chief investment officer at Centre Funds in New York.

"Combine that with the lofty stock valuations makes the market vulnerable for some degree of correction."

Abate said his firm has bought S&P 500 put options to protect against potential losses.

Thursday's gain pushed the S&P 500's price relative to future earnings to 18.6, the highest since 2002. Retailers paced stock advances, with Macy's and Kohl's climbing at least 14 per cent after reporting quarterly earnings.

Energy producers rebounded as crude rallied amid forecasts for growing demand from refiners. The Dow Jones Industrial Average rose 0.7 per cent to 18,622.63, topping its record close reached three weeks ago, while the Nasdaq Composite Index gained 0.5 per cent, on pace for a third record in five days.

Combine that with the lofty stock valuations makes the market vulnerable for some degree of correction.

Stocks have surged to all-time highs in recent sessions, boosted by better-than-estimated earnings, improving economic data and optimism central banks will stay supportive of growth.

After topping its previous record in mid-July, the S&P 500 has inched higher in a range, not moving more than 1 percent in either direction for 23 straight days, the longest streak since 2014. That has the CBOE Volatility Index holding near a two-year low, with the measure of market turbulence down 3.2 per cent today to 11.66.

With equities setting records, insider purchases are dwindling, with two buying for every nine that sold. At 0.23, the buy/sell ratio is about one-third of what it was in February and last August, and compares with an average of 0.69 over almost three decades.

It's people who are looking at the fundamentals of their business every day and seeing a picture that's deteriorating.

Echoing rising equity pessimism among executives, earnings sentiment is souring.

After predicting profit would expand 2.3 per cent at the end of June, analysts now see S&P 500 income contracting 0.6 per cent. That would put US companies on track for a sixth consecutive period of falling profits, the longest since the financial crisis.

As earnings fail to rebound, companies looking to charge up their stock returns with repurchases are turning to debt markets like no time since the Internet bubble. The proportion of buybacks funded by debt rose above 30 percent in June for the first time since 2001, data compiled by JPMorgan Chase and Bloomberg show.

Among other shares moving Thursday on corporate news, Alibaba Group Holding rose 5.6 per cent after its earnings surpassed projections. Yahoo!, an Alibaba stakeholder, added 3.8 per cent. Following the reports from Macy's and Kohl's, apparel companies in the S&P 500 rose toward a four-month high, while retailers briefly touched a record.

Mall owners sank as Macy's plans to close 14 per cent of its stores, with General Growth Properties and Simon Property Group losing more than 2.4 per cent. Shake Shack tumbled 5.7 per cent after quarterly same-store sales at the fast-food chain missed analyst projections.

- Bloomberg.