Bad news for the US market – insiders are bailing out of its hottest stocks

There are ever more signs that the US stock market is getting frothy.

So far this year, 192 companies have gone public in the US, according to the FT. Between them, they've raised $51.8bn the highest level since 2000.

Now, you could argue that many of these companies have better finances than those that came to market back in the days of the tech bubble.

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But what's really troubling is that insiders seem very keen indeed to get out while the going's good.

We're seeing a lot of what's known as busted lock-ins' and that's not the only sign that the US is looking bubbly

What is a busted lock-in', and what does it mean for the US market?

There are two reasons for this. Firstly, it helps investors who buy at the IPO to feel confident that the share price won't be hit straightaway by a flood of early selling.

Secondly, it means that potential investors get a chance to scrutinise a company before insiders start selling. In other words, it creates a more level playing field, as the insiders' information advantage is partially eroded. After all, if you think about it, selling a company isn't too different to selling a used car the previous owner generally knows a lot more about how well it really runs than the buyer does.

However, with some IPOs, insiders get permission to sell shares before this lock-in period is over. The insiders seek permission from the investment bank that sponsored the IPO. Permission will normally be granted if the company's share price has performed strongly since the listing. Investment banks, needless to say, also often have a financial incentive to grant permission, as they may receive some commission on the trades.

According to the FT, research from Dealogic shows that IPO lock-ins have been busted at 26 US companies this year, with share sales worth $7.4bn. That's the highest number of busted lock-ins since 2000 when the figure hit 43.

That's a worry. Insiders may be being overly cautious, but they arguably represent the best-informed money in the market. If they think this is as good as it gets, we should pay attention. And if you look at some of the IPOs that have hit the market, it's not hard to see why.

For example, the IPO of the year that of social media website Twitter certainly has echoes of 2000, and a time of grossly overvalued share prices. I thought Twitter was overvalued before it listed but the share price has risen by two thirds since the IPO.

Twitter is valued at $25bn. And yet it only generated revenue of $254m in the first half of this year that's sales, not profit. Its user growth has already started to slow in the US, and I'm not convinced there are that many opportunities for advertisers on the site. So $25bn seems way too high, and Twitter isn't the only over-valued tech share out there at the moment.

It's not just the technology sector

Looking at the wider market, there's another important signal that many share prices have risen too fast the Shiller p/e ratiofor the whole market is 25, well ahead of its historic average of 16. As you may have noticed, we're big fans of the Shiller p/e ratio at MoneyWeek. Instead of taking a single year's earnings, and comparing it to the share price, it takes an average of earnings over the past ten years. That means short-term volatility due to ups and downs in the economic cycle should be smoothed out.

Don't get me wrong, I'm not suggesting this is March 2000 all over again. Not yet, at least. Back then, the Shiller p/e hit 43. And as always, there are pockets of value in the market even some tech stocks look reasonable, such as Google.

However, I think investors should be very wary about investing in the US market as a whole via a tracker, for example. Although the Shiller p/e is way below 2000 levels, that was very much a record peak the mean average level is around 16.5.

US bulls might point to the encouraging jobs data that came out on Friday. Unemployment has now fallen from 7.3% to 7%. But even that data isn't unreserved good news for the US stock market. As the economy appears stronger, the Federal Reserve is more likely to start tapering its bond purchases. Any change to the current ultra-loose monetary policy could hit share prices which may well be one reason why insiders are locking in their gains now.

Overall, I'd prefer to stick with less frothy markets. The good news is that there are several. My colleague John Stepek recently looked at some of the most promising, and most detested markets including China in MoneyWeek magazine. If you're not already a subscriber, subscribe to MoneyWeek magazine.

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