Two Red Flags the Market is Ignoring

2 major red flags

On the surface, the market appears confident. But underneath, there are troubling disconnects that suggest a different story—one of fragile conviction and financial engineering. For the prudent investor, these aren't just curiosities; they are significant red flags.

Right now, two powerful signals are flashing warnings: a record lack of belief among the professionals who manage billions, and a surge in corporate buybacks that seems to benefit insiders more than anyone else. Let's break down what’s happening and why it matters.

Red Flag #1: A Market Running on Fumes

The first warning comes from fund managers. An incredible 91% of them now believe U.S. equity markets are overvalued. You would expect this skepticism to translate into caution—selling off assets and holding cash.

Instead, the opposite is happening. These same managers are "nearly fully invested," with cash balances at near-record lows.

This is the definition of low-conviction investing. They are holding assets they don’t truly believe in, likely driven by a fear of missing out (FOMO) or career pressure to stay in the game. This creates a tinderbox environment. Without genuine conviction, managers are prone to sell at the first sign of trouble, making the entire system fragile and vulnerable to shocks.

Red Flag #2: The Hidden Truth Behind Stock Buybacks

The second warning sign comes from corporations themselves. We’ve just seen a month of record corporate stock buybacks, which is often presented as a sign of confidence—a company investing in itself. But the reality is far more complicated.

Here’s what’s really going on:

• A Tool for Insider Selling: Buybacks don't benefit all shareholders equally like dividends do. They create a massive, price-insensitive buyer in the market—the company itself. This provides the perfect opportunity for corporate insiders (executives, board members) to sell their own shares at an inflated price.

• Engineering Short-Term Illusions: Companies often use buybacks to manipulate their earnings per share (EPS). By reducing the number of outstanding shares, EPS automatically goes up, even if actual profits are flat. This helps executives hit performance targets, trigger their bonuses, and keep Wall Street happy.

• Actions Speak Louder Than Words: The data from July is alarming. While companies were buying back their stock at a record pace, corporate insiders were selling theirs at the highest rate since at least 2018. If insiders truly believed their stock was undervalued and that future growth was strong, they would be buying, not selling into the buyback rally.

• A Misallocation of Capital: Every dollar spent on buybacks is a dollar not spent on innovation, research and development, strategic acquisitions, or paying down debt. This focus on short-term stock price management can starve a company of the long-term investment it needs to actually grow.

My Takeaway: Don't Mistake Financial Engineering for Real Value

These two red flags paint a clear picture: the current market is being heavily influenced by short-term incentives, not long-term fundamentals. Fund managers are reluctantly participating, and corporate insiders are using company cash to exit their own positions at favorable prices.

This isn't a reason to panic. It is, however, a critical reason to have a resilient strategy that doesn't depend on a fragile status quo. With OPTI Strategies, my goal is to help you see past the noise and build a plan based on defined risk and genuine peace of mind, so you're prepared no matter which way the market turns.