By Michael Brush, MarketWatch
With everyone from DoubleLine Capital’s Jeffrey Gundlach to inverted yield curve disciples now forecasting a recession, it must be time to join the crowd and sell stocks, right?
Actually, this is exactly the wrong thing to do right now.
So say the “forecasters” with the best view on the economy: corporate insiders.
In the 5%-7% decline in the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.01% , Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.68% and Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +1.04% since I suggested it was time for caution on stocks, insiders have stepped up to buy a big way.
More importantly, to me, they’ve put a decided emphasis on economically sensitive names. I recently told subscribers of my stock letter Brush Up on Stocks to get more bullish on stocks because of robust insider buying in cyclical sectors like tech, banks, industrials, chemicals, airlines, autos, hotels, energy, mining, and brokerage and investment companies.
Insiders would definitely not be doing this if — like Gundlach — they saw a recession on the way. Instead, they’d be on a buyer’s strike, or at best they’d favor utilities or consumer non-discretionary companies. But that’s not what we see at all.
Some notable examples of high-profile, economically-sensitive names where insiders are buying in large amounts include: JPMorgan Chase /zigman2/quotes/205971034/composite JPM -0.19% , where a director just put $2 million into the bank’s stock; Ford Motor /zigman2/quotes/208911460/composite F -0.65% , where Chairman William Clay Ford bought $7.9 million worth of stock; Chevron /zigman2/quotes/205871374/composite CVX +0.04% , where a director bought a half million dollars’ worth; Dow /zigman2/quotes/203121064/composite DOW -0.61% , where a director put $1.3 million into the stock; Marriott Vacations Worldwide /zigman2/quotes/200002947/composite VAC -0.02% , where CEO Stephen Weisz bought $335,000 of stock; and eBay /zigman2/quotes/204653455/composite EBAY +2.05% , where a director bought nearly a quarter million worth.
If the economy were about to tank, these insiders would not be buying these economically sensitive names in such large amounts. And this isn’t just exercising stock options, which doesn’t appear as insider buys in reporting and is excluded from this analysis.
Here’s another factor that reinforces the bullish take among insiders. Several of the sentiment indicators I track have now turned decidedly negative. This is a bullish sign from the contrarian point of view. Last week, two Cboe Options Exchange put/call ratios turned bearish (spike in bearish put buying vs. decline in bullish call buying), and the American Association of Individual Investors survey turned negative.
A basic rule I follow when making market calls in my stock letter is that when insiders are bullish and the crowd is bearish, it’s time to buy stocks. None of this means we will see the bottom in the selloff today or tomorrow. No one can make calls that precise. But insiders are telling us two things. We’re getting closer to the bottom, and worries about the economy are exaggerated.
A pipeline of stimulus
Before we get to more stocks that look attractive because of bullish insider buying, why might the economy be on track for sustained growth if analysts and investors are so bleak?
While many commentators focus on the negatives of trade wars and the inverted yield curve, they’re overlooking the pipeline of economic stimulus in the works, says Leuthold Group chief investment strategist James Paulsen.
He cites the decline in the entire yield curve in the U.S. and negative interest rates abroad. For example, the U.S. yield curve has fallen by about a percentage point across the board in the past six to nine months. In Germany, 10-year bonds now carry a negative yield of about 60 basis points, a 1.2 percentage point shift since October. Both make money cheaper, which encourages borrowing to stimulate the economy.