S&P 500 Rallies as Key Insiders Dump Stock, Traders Add Shorts

S&P 500, Market Sentiment, Insider Activity, Retail Trader Positioning – Talking Points

• IG Client Sentiment net-short positioning grows and sends a contrarian bullish signal
• Key executives of top S&P 500 companies liquidate stock amid the coronavirus pandemic
• Lack of optimism within companies, particularly among CFO’s, seems ominous

The S&P 500 has recovered nearly all losses since the COVID-19 pandemic sent markets into a tailspin earlier this year. Since the stock market bottomed back in March, the S&P 500 has gone on to climb over 40%. However, the current rally across risk assets seems untrusted by some investors as awareness of equity fundamentals appears lacking – or largely ignored.

Regardless, the S&P 500 index continues to tick highereven as COVID-19 infection rates jump higher in the United States. Perhaps the relentless uptrend is owed primarily to the flurry of support from monetary and fiscal authorities.

S&P 500 Index (Daily Price Chart)

Source: IG Charts

That said, in the wake of these unprecedented times and lingering volatility, being mindful of sentiment and market positioning can provide useful insights about the expected direction of stocks. One way of doing so, is by viewing IG Client Sentiment, which offers a view on retail client positioning, derived from live IG retail traders. It is important to note that client sentiment is typically regarded as a contrarian indicator. Moreover, extreme levels often warrant paying greater attention to.

According to the latest IG Client Sentiment Report, retail traders maintain a net-short position on the S&P 500 index. The chart below reveals that 71% of traders are net-short the S&P 500 as of Thursday. As previously mentioned, being a contrarian indicator, IG Client Sentiment sends a bullish signal for S&P 500 price action. Further, this past week witnessed an increasingly net-short position taken on by retail traders even as the S&P index continued to trend higher.

US 500 Client Positioning (Daily Price Chart)

Source: DailyFX

In comparison to retail trader positioning, we can look at corporate insider transactions to serve as another bellwether for market sentiment. Unlike IG Client Sentiment, however, key insider activity is more straightforward: insider buying is generally viewed as bullish and selling as bearish.

The reason being is that corporate executives are thought to have a more informed picture of regarding long-term business prospects and where their company is headed. Yet, there are some nuances to consider when viewing the data and thus limits its usefulness to broad-based generalizations.

Insider Transactions within the 10 largest S&P 500 companies by market capitalization

Source: SEC, BBG

Nevertheless, when looking at insider transactions within the top ten companies in the S&P 500 by market cap, which comprises nearly 28% of the index weight, a bearish picture emerges. In total, and excluding warrants and gifts, which are often scheduled transactions, selling of equities within the top 10 companies vastly outweighs insider buying, with net sales totaling almost $2.6 billion since March 2020. This selling activity could indicate that corporate executives view a rough time ahead for their companies.

Likewise, and in line with sentiment reflected by recent insider transactions, data on CFO optimism, provided by Duke University’s Fuqua Business School, exhibits an increasingly pessimistic view of not only the overall economy, but also regarding their own firms. As the most senior executive responsible for managing a company’s finances, chief financial officers have a particularly unique position to judge the projected path of revenue and earnings for a company. According to Duke’s CFO survey, levels are suppressed to near historical lows.

Duke CFO Global Business Outlook

Source: Duke University Fuqua School of Business