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The stock markets have been rising, but insiders have been selling. In fact, they’ve been selling at a record pace. CNBC has reported that there have been 9 insider sales for every 1 buyer over the past week. Of course, insiders know more than the average participant, not only because of their individual knowledge but also because of their industry contacts. But more important, insiders have an uncanny ability to time the market. The last time insiders were selling so aggressively, it was in early 2012 just before the S&P 500 went down by 10% to the low of the year. A similar situation happened in 2008 before the crash caused by the credit bubble.
Another alarming event, a mystery trader has purchased a ‘massive’ put option on the Financial Sector ETF XLF. Normally investors may buy 50 or even 100 or 500 of an option but this trade was placed for 100,000. It will pay off if the XLF dips below $16. This may be a simple hedge against a long trade, but there are other ways to do it, says Barron’s columnist Steven Sears. The puts were purchased with an expiration date of April, indicating an event before then.
This data is not isolated, Art Cashin of UBS also noted a huge $11.25 Million bet that the VIX will soon explode higher. We don’t know who the identity of the investor is, only that he bought 150,000 contracts.
Rumors of a market crash have subsided as attention was diverted before the holiday to the Fiscal Cliff, and then the debt ceiling. This new information indicates that there is something to the story of a 2013 stock market crash, as purported by traders such as Marc Faber. The Fed has announced a QE Infinity money printing program to boost the economy, while countries such as Germany have started a process to repatriate their gold.
These indications are not a guarantee that the market will crash, but it’s something investors should be aware of and consider. One prudent defensive strategy is to maintain stop losses on long positions in the stock market.
Those who want to capitalize on a market crash could consider purchasing put options on any long contract (such as stocks or a market index).
