CDT Insider Sentiment
March 2024: High - Sentiment
Free to Move About the Cabin.
A Year’s Worth of Returns in 90 Days. In Q1, the S&P 500 packed in a year’s worth of returns in just one quarter. On a total return basis, for the last 10 years, quarterly returns have averaged +3.8%, for Q1-2024 that number was an impressive +10.6%. Ostensibly, given this remarkable return profile, we should and do have valuation concerns for the market. Since the October 2023 low, the S&P 500 Total return has gone up a blistering +28.5% pushing up our normalized price-to-earnings ratio to 24.5x, or 22% above the average 20x since 1997. Moreover, with the 10-year averaging 4.2%, the excess earnings yield or the earnings yield (P/E inverted) minus the 10 yr. treasury rate is now negative for the first time since 2007. To be absolutely clear, we are not making the case that a 2007-like bear market is imminent, the Great Financial Crisis did not result because of lofty stock market valuations. However, we are observing an inflection between the relative attractiveness of the fixed income market and stocks that should not be ignored. According to our research, when the excess earnings yield is negative the probability that the next quarter’s returns will be negative too is 66.7%. That is double the normal risk of the market.
Insiders Sentiment Bounced Back in March. After a 2-month hiatus, insiders returned to the market with relative purchase activity not observed since the end of 2023. We note that March’s jump in sentiment amid a market rally lays in stark contrast to the group’s notorious reputation as astute contrarian investors. Typically, we observe insiders that are eager to leverage their information advantage to catch market bottoms or endorse an early rally, but they were conspicuously late to this dance. We suspect that the out of sync insider behavior has to do with the composition of the market.
Right now, the market (defined by the S&P 500) is exceptionally top heavy. As of today, the top 10 companies in the 500-company index represent 32.2% of the total weighting and in Q1, almost 50% of the +10.6% return can be attributable to just 4 names (Article), Nvidia, Microsoft, Meta and Amazon. According to Amundi Asset Management, the market weighting of the top 10 stocks is the highest it has been in 30-years (Article). What that translates to is a large group of company stocks that may not have enjoyed the same returns as the market and insiders are acting on the mismatch. Take for example one of the most active names for the month, Lululemon (Disclosure: no ownership). The stock is down -23.5% and the Chairwoman of the board is finding value in her stock that has been left behind in an artificial intelligence focused rally.
Our conclusion is that we suspect the market rally that we observed in Q1 has and will likely continue to broaden out to other sectors of the market. With more and more insiders raising their hand to proclaim untapped value, we expect the sectors of the market that have not received their fair share of attention will likely get some of the limelight in the near to medium term.
How it Works:
Objective: Predictive model that measures the historical relationship between insider sentiment and the future probability of downside volatility (risk)
Insider Trading Activity: Purchase activity of an insider’s own stock filtered by proprietary parameters to scrub noisy data
Insight: Executive-level insider sentiment is an indicator of near-term financial market risk
- Low executive sentiment suggests a high level of risk
- High executive sentiment suggests a low level of risk
Scale: A ratio of current insider trading activity in relation to historical patterns
- (0 to ∞) with a historical median measure of 1
- Below 1 implies an above normal level of risk
- Above 1 implies a below normal level of risk
Frequency: The measure is updated daily and historically been subject swift and possibly extreme shifts
*This webpage is updated monthly and provides just a snapshot of the most recent month-end
Disclosures:
This presentation does not constitute investment advice or a recommendation. The publisher of this report, CDT Capital Management, LLC (“CDT”) is not a registered investment advisor. Additionally, the presentation does not constitute an offer to sell nor the solicitation of an offer to buy interests in CDT’s advised fund, CDT Capital VNAV, LLC (“The Fund”) or related entities and may not be relied upon in connection with the purchase or sale of any security. Any offer or solicitation of an offer to buy an interest in the Fund or related entities will only be made by means of delivery of a detailed Term Sheet, Amended and Restated Limited Liability Company Agreement and Subscription Agreement, which collectively contain a description of the material terms (including, without limitation, risk factors, conflicts of interest and fees and charges) relating to such investment and only in those jurisdictions where permitted by applicable law. You are cautioned against using this information as the basis for making a decision to purchase any security.
Certain information, opinions and statistical data relating to the industry and general market trends and conditions contained in this presentation were obtained or derived from third-party sources believed to be reliable, but CDT or related entities make any representation that such information is accurate or complete. You should not rely on this presentation as the basis upon which to make any investment decision. To the extent that you rely on this presentation in connection with any investment decision, you do so at your own risk. This presentation does not purport to be complete on any topic addressed. The information in this presentation is provided to you as of the date(s) indicated, and CDT intends to update the information after its distribution, even in the event that the information becomes materially inaccurate. Certain information contained in this presentation includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results, and such differences may be material.
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