By Michael Brush
Cautious insiders, euphoric investors and seasonal weakness – what could go wrong?
The U.S. stock market has been remarkably calm since rebounding from the tariff tantrum. Stocks have posted steady, almost daily gains for the past two months – but all that will likely change soon.
You can expect downside volatility over the next three months for three reasons. But before you hit the “sell” button, here’s a word of caution.
If you are a long-term investor who dollar-cost-averages into indexes every month or so – which is the wisest way to invest – don’t panic if a sharp selloff happens. And don’t sell out now ahead of the expected pullback. It’s too hard to time quick exits and re-entries correctly.
There are ways to navigate this, below, depending on what kind of investor you are. But first, here are three reasons why heightened downside volatility lies ahead.
1. Insiders have turned troublingly cautious: We can see this clearly now in the insider sell/buy ratios tracked by Vickers Insider Weekly. Vickers’ one-week sell/buy ratios turn bearish when they rise to six or above.
For the week ending July 25, the one-week sell/buy ratio was nearly double that, at 10.47 for New York Stock Exchange stocks; the week before it was 15.6. For Nasdaq, the ratio was 5.5 last week and 9.3 the week before. For all exchanges, this ratio was 7.15 and 10.9 the week before.
“With stocks dancing at all-time highs, there is currently nothing good to report when it comes to insider sentiment,” noted Jasper Hellweg of Vickers Insider Weekly.
The situation looks even more troubling when you drill down on sectors. Some commentators are worried that Berkshire Hathaway (BRK.A) (BRK.B)) has been aggressively selling its shares of both Bank of America (BAC) and Citigroup (C).
This by itself is not necessarily a negative for the banking sector. “It is not anything really new. It has been going on for about a year,” Hellweg said in an interview. Besides, Berkshire Hathaway still has positions in Jefferies Financial (JEF) and Allied Financial (ALLY), Hellweg noted.
That said, banks are showing signs of trouble. Overall, bank-sector selling by company insiders is extremely high compared with their buying. Recently, the sell/buy ratio for banks was “almost off the charts” negative, Hellweg said. Bank insiders sold $40 million worth of stock, compared with purchases of just $330,000. The prior few weeks were negative as well. Hellweg highlighted heavy insider selling at Morgan Stanley (MS) and BlackRock (BLK).
Insider negativity in financials is troubling because it is a cyclical group. That means the sector does poorly when the economy weakens. Bank insider selling is a bad sign as well because banks provide capital – the fuel for economic growth.
Insiders are also cautious on other cyclical sectors, including industrials, technology and consumer discretionary. Another problem is they are only bullish on defensive sectors, which hold up better in times of trouble. Last week, they were bullish on just one sector: consumer staples. In the prior two weeks, they were only bullish on defensive sectors healthcare and real estate.
The pushback: Insiders are not always right; historically, they are early. This suggests there could be more upside to the current rally before trouble hits. Plus, unlike bank insiders, Wells Fargo banking analyst Mike Mayo – a prominent bank-sector expert – is bullish on banks. His favorite is Citibank. I single out Mayo because while analysts at sell-side shops generally have a bullish bias since their investment banking arms are in the business of selling stock, historically Mayo has been more of an independent thinker on banks.
2. Investors are turning quite bullish: Crowd-following, momentum-driven investing works nicely until it doesn’t. The best way to do well in the stock market is to go against the crowd. That’s because the crowd is so often wrong. “When everyone’s yelling, you better be selling,” according to proponents of this contrarian style of investing.
There are growing signs that investors are quite bullish – or at least complacent – if not yet “yelling” with enthusiasm. A recent Bank of America fund-manager survey found that cash as a percentage of assets under management fell to an extreme low of 3.9%. This elevated level of cash deployment into stocks is high enough to be a “sell signal,” said the BofA analysts.
The survey also found the biggest surge in optimism on company profitability since July 2020. It found investor sentiment is the most bullish since February. And the survey found that an elevated 59% of fund managers see a U.S. recession as unlikely, up from 42% in April.
Leuthold Group’s Doug Ramsey pointed out that cyclical stocks are trading at a record premium versus defensives, suggesting heightened bullish sentiment. It means investors have a strong appetite for risk (cyclical stocks) and low demand for the safety of defensive names.
The pushback: The good news (from a contrarian perspective) is that while bullish sentiment is now elevated, at least it is far from extreme. The Investors Intelligence Bull/Bear ratio was recently at 2.62. By how I use this measure, sentiment is not troublingly high until this ratio hits 4 or more. In short, while sentiment has not climbed to extreme worrisome levels, complacency has crept in to the point where the market is now more vulnerable than normal to pullbacks (which would be buyable).
3. We are entering the “spooky season” for stocks: So often during the dog days of summer, investors forget that the disaster months of September and October are just around the corner. In these two months, sharp market pullbacks are more likely to happen – they’re the two worst months for stock gains. Typically, the low for the year is around Oct. 11.
No one really knows why this is the case, but I like two theories. My favorite is that tens of thousands of years of evolution have taught people that the first jolts of cooler weather in September and October signal it’s time to go into harvest mode. The cold snaps create a hunker-down mindset that translates into “sell stocks, build cash.” I get that the seasons are reversed in the Southern Hemisphere, but most of the world’s leading financial markets are north of the equator.
The second theory is that the tax-loss selling season for fund managers ends on Oct. 31. This means fund managers sell a lot in September and October to book losses to offset gains. This is more likely to happen in a year with gains – like this year so far.
The pushback: Not all Septembers and Octobers bring market weakness.
What to do now
If you are a long-term investor, there is no point in selling now to avoid a pullback that may not happen. Besides, even though it looks easy in hindsight, it is always tough to time exits and re-entries correctly.
If there is a 5% to 10% correction, don’t panic and sell. The odds of a recession seem low right now. That’s because the balance sheets of consumers and companies are strong. They’re not displaying vulnerabilities that usually contribute to recessions, according to Jim Paulsen of Paulsen Perspectives on Substack. If anything, step up dollar-cost averaging into any significant declines.
If you are a trader, consider taking profits faster now and preserving cash to have buying power in case spooky-season selling hits. Given the negative tone of insiders and the bullish mindset of investors, the odds of this are much higher than normal.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested BRK.B, BAC, C and JEF in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
More: Where Morgan Stanley is looking for value after powerful rebound in U.S. stocks
Plus: The E.U. to buy $750 billion of U.S. energy products. Why that’s ‘absurd.’
-Michael Brush
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07-29-25 0741ET
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