Main Menu

This was written on 12/16/2010

Corporate insiders, the smart money, are selling at the fastest rate since only some months before the last big downturn, and at a rate that is higher than what one would expect given all the stock option rewards of recent times.  Corporate insiders have a long history of getting it right - and I do not think they will get it wrong this time, either. 

First some background information -

The stock market upturn since March 2009 is a bear market bounce - not a new bull market, which is what most people are calling it due to the sheer size of it. 

But sheer size of a market up-move is meaningless these days - because of how much the market was propped up for so many years while the authorities were successfully enforcing the law against recessions.  When the system was not allowed to go down, something had to give - and what gave was that the stock market went way up. 

So a bear market, and the bear market bounces within it, have to be evaluated in that context these days - in other words, it is to be anticipated that even the down and up moves after the bear market has started will be much larger than typical bear market moves have been in the past.  The current bear market started in 2000 - and because of the sheer size of the moves in the meantime, which were a direct result of how high the market went during the bull market, the up-moves in the meantime have to be evaluated in the context of their quality, their underlying technical characteristics, not their sheer size

The underlying technical characteristics of a bear market bounce are very different from those of a bull market - in fact, very nearly the opposite

And the underlying technical characteristics of the move in the mid-2000's were that it was unmistakably (to someone who knows what to look for) a bear market bounce - even though it went to a new high in the end, which made it an overall corrective move that is called a flat (a flat well more than retraces the entire move up after the new high has been made, and that is what happened this time, too, the market went to new lows for the bear market afterward) - and the up-move since March 2009 also has the unmistakable characteristics of a bear market bounce. 

So now my main point -

We are at or near the end of a bear market bounce again (but one that is different in form from the one in the mid-2000's) - and the insiders are selling like crazy.  They sense that we are near a market top (as the end of a major  bear market bounce will, of course, be) - and so they are trying to get out with their profits. 

Can the bear market bounce go on for a while yet?  Yes.  In fact, it has already gone on for close to a year longer than it nominally should have - because of the continued ever-more-extreme attempted enforcement of the law against recessions.  But notice what has happened - the market has hardly gone up at all this year, it has basically gone sideways.  In other words, there is no real upward progress - and that is what one should expect in this form of bear market bounce after the initial burst up, which happened coming out of the low of March 2009.  Can the Wall Street traders keep it going for longer?  Yes - but they will not make much upside progress, and the longer they keep the market up, the worse the consequences will be when they finally get overwhelmed by worsening world circumstances and sell in a panic to protect their profits. 

The reality is that the bear market bounce from March 2009 is thinning out dramatically - and so I do not think the Wall Street traders are going to be able to keep it up much longer.  And it seems that corporate insiders are sensing that, too, and getting out before it is too late. 

Why do I talk, here, about Wall Street traders, and not about the Fed?  Because it is my contention that the Fed lost control two years ago already during the downturn.  By definition, if there is a law against recessions and it is the task of the Federal Reserve to avoid recessions, period (the law against recessions mandates the Fed with that task), then when a deep recession happens, the Fed has lost control.  I predicted years ago already - in 2001 - that the Fed would lose control sometime between 2007-2010.  As it happened, the downturn happened just about in the middle of my expected time-frame.  But I also knew that another downturn would come later - after a big bounce in between. 

I knew that there would be a big bounce, a partial recovery, after the initial economic downturn because my contention is that once the Fed would lose control, the stock market would start trading normally again (albeit starting from very high levels due to the levels reached during the bull market) - and a normal big downturn consists of an initial big downturn, followed by a major bear market bounce, followed by another downturn that is even worse than the first downturn.  That even worse downturn is what is coming next in the big picture. 

But what happened so far, during the bounce, is that even though the Fed lost control two years ago (everything that has happened so far in the economy, during the bounce, that the Fed talks about is things that I expected to see during the bounce, including all the stuff that the Fed does not like because they want the economy to get better faster), the Wall Street traders went back to law against recessions mode, too, once the stock market came back up (especially once the Dow made it back above 10,000), and have been absolutely determined all this year (2010) to prevent the market from going down again in the hope that that will help support the economic recovery.  So the bear market bounce drags on and on and on and on and on and on - but it keeps thinning out more (no surprise to me) and sooner or later, the traders just won't be able to keep it up anymore. 

In other words, the market is still staying up because the Wall Street traders are directly in control of it, i.e., they are still in control of what they are in charge of, unlike the Fed, which lost control of what it is in charge of two years ago (and was only indirectly in control of that to begin with). 

So as long as the traders do not get spooked, the market will stay up - but world circumstances will continue to get worse (they always do as a large bear market progresses) and so sooner or later, the Wall Street traders will get spooked in a big way, and when that happens, it will be all over with, they will sell in a big panic and that will bring the stock market down far and that will be the end of any hint of bullishness that is left in the system yet. 

Anyone who does not prepare for that ahead of time is probably going to get nailed in a big way when the time comes.

Why is that?  Well, one can stay in the market and hope to pick up any remaining profits and then try to get out when it becomes clear that the market is going down.  The problem is that when the kind of panic that I just described starts, typically everyone tries to get out at the same time and the market goes down very rapidly, which makes hanging on to those profits very difficult.  It is better to get out before the end - one has a better chance of keeping the profits one has accumulated along the way.  In other words, once the market shows signs of really slowing down and getting ready to go down, it is better to get out then already - one won't give up much in profits and one will ensure that one keeps the profits one has.  But the reality is that most people won't do that - and they will get caught in the panic when the stock market finally goes down in a big way and will probably lose most of their profits, many may well even lose almost all of their profits, and that is part of what is going to make the coming downturn that much worse. 

Why will so many of them lose so much of their profits?  Because to be able to sell a share of stock, one needs a buyer - and there are few, if any, buyers in a panic sell-off in the stock marketEveryone wants to get out at the same time, not in.  What typically happens is that people put their shares up for sale, but the market drops so much by the time enough people step in to want to buy that most people who are selling get a much lower price for their stock than they bargained for when they made their shares available for sale.  So they take a huge hit financially, and usually very quickly - many people lose a lot of money very quickly.  The impact on the economy can be, and usually is, devastating.  We saw a mini version of this during the stock market panic in the fall of 2008 - and we will see a much larger version of it the next time around. 

Why can't big shots just jump in and buy lots of stock and prevent the panic collapse that way?  Well, that was actually tried in the panic of 1929 - and it didn't work, the market collapsed anyway.  And the market also collapsed in the fall of 2008 - conditions were just too dicey for the market to hold up.  I think the same thing will happen next time - world conditions are getting dicier all the time, and eventually they will simply overwhelm the system.  I think there is enough money in the stock market these days that there is no way a big-shot, or even a few of them, can step in and have enough money to overcome the sheer mass of panic that will break out when the time comes.