The stock market’s epic rise in 2021 is largely thanks to a handful of Big Tech companies driving the S&P 500 to new highs and led to a Santa Rally to end 2021! Top insiders have been selling record stocks as market breadth has been declining, so what is this signaling for 2022?
While Vice Chairman of Berkshire Hathaway Charlie Munger has curmudgeonly said that current levels in the stock market now are “crazier than the dotcom era,” some investors and analysts are actually worried that the stock market could be heading onto precarious footing in 2022.
Even though passive index fund investing has been a boon to many investors, at the same time some legendary investors like Michael Burry and Peter Lynch have been sharing warnings about passive investing. Peter Lynch suggested that passive investors could be missing out on market-beating returns.
Burry called the index fund and ETF boom a “dangerous bubble,” warning that “the flood of millennial money into index funds and ETFs was fueling unsustainable valuations and putting the stock market in a precarious position. “Parabolas don’t resolve sideways,” as Burry tweeted before. Even though Burry could be coming off like “the boy who cried wolf,” it’s still a warning worth heeding from the Big Short investor.
And even though buying the dip has been popular throughout 2020-2021, in the mean time CEOs and corporate insiders have sold over $69 billion of stocks in 2021.
Since the S&P 500 has been outpacing its equal-weighted version in recent months, this is suggesting that only a few stocks are continuing to lead the market to new highs.
According to the WSJ and Goldman Sachs analysts, “five of the biggest stocks in the S&P 500 account for more than half of the broad benchmark’s gain since April .”
Of the S&P 500’s 2021 performance, Microsoft, Nvidia, Apple, Google, and Tesla are responsible for a third. If there were to be weakness in any of these stocks, that could be foreshadowing potential future declines in index funds.
According to the American Association of Individual Investors’ weekly sentiment survey, expectations that stock prices will go down over the next six months rose to 42% in early December 2021, the most bearish reading in over a year. Even recent results are still hovering more in the bearish red compared to the bullish green on the AAII survey.
Only 41% of the S&P 500 stocks were above their 50 day moving average per October 2021 figures. This has been declining since March 2021, signaling a bearish trend for the S&P 500.
The advance-decline line have been either plateauing, going sideways, or even declining.recently. The S&P 1500 has been going sideways or staying flat from October 2021 figures and the Nasdaq’s advance decline line has been falling over the last month, landing around its lowest level since November 2020.
Could it be possible that as some parts of the market are getting overvalued, that some Big Tech and other top companies’ CEOs and corporate insiders are being opportunistic to sell some of their high-priced stocks? While Bezos and Zuckerberg have sold millions of shares in 2021, Elon Musk takes the cake in selling at least $15.4 billion worth of Tesla shares at the time of writing.
You have to determine to what extent this amount of insider selling is just part of their normal compensation, or if it’s amounting to a larger trend.
In addition, more corporate insiders like the Walton family, Larry Page and Sergey Brin, David Rubenstein, and Michael Dell all sold significant amounts of stock. Contrast this with Warren Buffett who bought back Berkshire Hathaway stock instead of selling in 2021.
One wealth management professional is worried about the fragility of the stock market, in that so much wealth is in such few companies.
Peter Cecchini, director of research from Axonic Capital said, “If those companies, for whatever reason, stop performing, there’s nothing to support the market.” He also said “In order for the market to continue its advance, it becomes … reliant on fewer and fewer names. Any reversal in the performance of the names carrying the market won’t be met by strength in any of the other parts of the market.”
On the other hand, some economic signs suggest that stocks could be poised to keep going up as some corporate earnings and profit margins have been exceeding expectations lately. But other analysts believe conditions could break down as companies continue to struggle with supply chain issues, inflation, and labor shortages. More companies have issued negative earnings guidance in Q4 2021, the most since Q2 2020, a potential sign of reversal with earnings trends.
With the most amount of IPOs and SPACs, a lot of these startup companies rely on Big Tech services like cloud services from Amazon and Microsoft, advertising services from Google and Facebook, and platform services from Apple. A decent chunk of revenues (up to 10%) to Amazon, Google, Facebook comes from startup companies, so if startups were to start struggling or if there might be less IPOs in the coming years, that could be a hit to the revenues of the Big Tech companies.
It certainly feels like we have a Roaring 20s, and only time will tell, or interest rates, if the good times will keep on rolling. In the mean time, I’m planning to stay patient and humble, gathering cash in the event that there may be more buying opportunities for me in the future. It’s good to be prepared no matter what might happen in 2022 and beyond. Happy Holidays!!
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
I look forward to making more investor friends! Add me on Instagram at michellemarki! 🎄