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Record selling by insiders is setting up stocks for a big fall, says contrarian investor

After a year of record stock buying on Wall Street, the message from forecasters for 2022 has largely been “keep at it.” This week, we heard from Goldman Sachs, which sees households and corporate buying driving the S&P 500 to a 5,100 finish by the end of next year, and Sanford Bernstein, who said buy stocks even if real yields normalize, which it says justifies high valuations.

A contrarian voice has been Morgan Stanley, who is telling clients to resist buying U.S. stocks. From that same neck of the woods, our call of the day from the True Contrarian blog and newsletter’s chief executive, Steven Jon Kaplan, has a warning for investors who have been piling into this market.

“People are really underappreciating the degree of risk that they’re taking because now that we have — especially for the really big megacap names — even greater overvaluation than we’ve had before, the downside risk is extremely high,” Kaplan told MarketWatch in an interview on Wednesday.

While a year ago Kaplan predicted a big selloff that didn’t really materialize, he notes 2021 was “unusual” with stock inflows not seen in 20 to 50 years, depending on whom you ask, that kept markets propped up. So the biggest and strongest companies kept rising and the rest went sideways.

For 2022, he sees those highflying stocks falling hard and possibly panicking inexperienced investors. That is because “anybody who’s 30 years old or younger, the last time we had a bear market, they were in high school or even earlier grades so they don’t even have the experience of knowing what it’s like to invest in a bear market,” Kaplan said.

Among the warning signs, he highlights a favorite indicator of his — selling and buying by company insiders, which he tracks via J3 Information Services Group.

“We’ve had all-time record levels of insider selling meaning that the top executives, the people that are the most experienced investors in the world, have been pretty much spending all year getting rid of their stakes in some cases and unloading huge amounts of shares they have accumulated for decades,” said Kaplan.

For example, the chairman of broker Charles Schwab
SCHW,
+0.53%

who has been selling all year — the stock is up 50% — and of course Tesla
TSLA,
+1.12%

CEO Elon Musk has dumped over $8.8 billion — shares are still up 54%. Billions have been sold by the heads of Apple
AAPL,
+0.92%
,
Facebook parent Meta
META,

and Amazon
AMZN,
+3.53%

this year.

“So I think that the people that have the most knowledge are the most worried about a drop and people that have the least experience in some cases, maybe just started trading in the past year or so, consistently, are the most aggressive and the most optimistic about what’s going to happen,” Kaplan said.

“History has shown us that when you have that big a difference in opinion from the most experienced to the least experienced people that the most experienced ones always come out on top,” he said, adding that the opposite has also held true with big insiders buying at crucial moments, such as in March 2009.

One sign that those investors are trying to position more conservatively could be driving dollar
DXY,
-0.27%

gains this year, he added.

As for what it will take to normalize price earnings ratios that are on average about “triple where they need to be,” Kaplan said most stocks would need to drop two-thirds. But “when things are either above or below fair value, and they come back to fair value, they rarely stay at fair value. They normally keep going because when people start to see things dropping a lot, they start to panic,” he said.

For where to park some cash for the coming storm, Kaplan suggests investors look at I-Bond or Series I savings bonds that can be bought directly from the government and are currently offering a return of 7%.

“You can put up to $65,000 a year into those and for 30 years, you can just keep them in there and just let them keep collecting whatever interest that they pay, which keeps changing every six months,” he said.

The markets

Stocks
DJIA,
-0.09%

SPX,
+0.34%

COMP,
+0.44%

are rising, led by tech stocks after Wednesday’s selloff. The Hang Seng
HSI,
-1.29%
,
meanwhile, dropped 1.4% led by tech stocks. The Turkish lira
USDTRY,
+3.79%

is diving further after the country’s central bank cut interest rates 100 basis points as widely expected.

The buzz

China tech giant Alibaba
BABA,
-9.10%

is down on disappointing results, stock in retailers Macy’s
M,
+22.15%
,
and Kohl’s
KSS,
+7.79%

are up on solid results. Applied Materials
AMAT,
+0.77%
,
software groups Workday
WDAY,
+0.03%

and Intuit
INTU,
-0.17%
,
pet supplier Petco
WOOF,
-10.68%

and luxury-retail platform Farfetch
FTCH,
+0.69%

have results due after the close.

Nvidia
NVDA,
+10.51%

is up after the chip maker beat forecasts. But networking group Cisco Systems
CSCO,
-8.19%

is down earnings guidance disappointment. Apparel maker Victoria’s Secret
VSCO,
+16.44%

is soaring on a profit beat.

Keep an eye on Boeing
BA,
+0.79%

after JPMorgan upgraded the plane maker to overweight.

The Occupational Safety and Health Administration is temporarily suspending a U.S. government vaccine mandate for private employers with more than 100 workers. Disney
DIS,
-0.95%

Cruise Lines will require COVID-19 vaccine proof from passengers aged five years and up starting in January. And here’s the big global study that says mask-wearing does work against COVID.

Weekly jobless claims dropped to a prepandemic low of 268,000, while the Philly Fed manufacturing index surged in October. Still to come are leading economic indicators and we’ll also hear from Chicago Fed President Charles Evans and San Francisco Fed President Mary Daly. Speaking late Wednesday, Evans said he was less confident of inflation receding.

Random reads

Young American tourists fined $905 for sneaking into Rome’s Colosseum to drink a couple of cold ones.

“The Office” star Brian Baumgartner has raked in $1 million, just through appearances on celebrity/fan app Cameo.

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