Welcome to edition 520 of Insider Weekends. The Nasdaq hit an all time high intraday on Friday and the recovery from the March lows almost appears to be complete. The S&P 500 is lagging behind a bit and the Russell 2000 index of small cap stocks is still off more than 13% from its February high. The stock market rally has come as a big surprise to most seasoned investors, myself included. One theory proposed for the strength in the U.S. markets was that it was the best house on a burning street and there is a global flight to quality. However this stimulus driven rally is not just a U.S. phenomenon as you can see from the following chart comparing the last three months of performance of the S&P 500 with a developed markets ETF (EFA) and an emerging markets ETF (EEM).
If it is not a global preference for U.S. stocks then is it as simple as the age-old adage of “don’t fight the fed”? Or potential treatments in the form of a combination of Hydroxychloroquine with zinc or Gilead’s Remdesivir? Could it be the potential of having a vaccine available by the end of this year or the decline in cases in China, South Korea and then Europe? Maybe it is just Robinhood traders having fun bottom picking and being right.
I don’t post these questions from a place of bitterness at having missed this rally. To the contrary, I have been buying during the downturn by starting five new positions and adding to three existing positions. The latest of these new positions was a merger arbitrage opportunity I picked up last week. I am genuinely surprised by the strength of this rebound, especially in sectors like airlines, which are probably going to take a long time to recover as discussed in the insider sales section of this article.
I wrote about a COVID-19 playbook for premium subscribers in early April discussing four scenarios and my perceived probabilities of those scenarios playing out. I wrote the following in that post,
The insiders were right about buying their stocks in size both after the Great Recession and after this COVID-19 downturn. In the second week of March, insider buying surpassed insider selling for the first time in 10 years. The following week, which marked the bottom of this downturn, insiders once again bought more shares than they sold. In our March 22nd article Insider Buying Once Again Surpasses Insider Selling I wrote,