3 Reasons Why the Stock Market is on the Brink of Losing 5%-10% and What to Do Now

Since recovering from the recent tariff-driven market turbulence, U.S. stocks have maintained an unusually steady climb. For nearly two months, the market has delivered consistent gains with little volatility. However, this calm period is likely to end soon, as several factors point toward increased downside risk over the next three months.

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Before making any hasty decisions to sell, long-term investors should exercise caution. Those who regularly invest through dollar-cost averaging into index funds should avoid trying to time the market. Sharp pullbacks are notoriously difficult to navigate with quick exits and re-entries. For most long-term investors, the wisest move is to stay invested and, if anything, continue buying during market dips.

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That said, traders and shorter-term investors should prepare for heightened volatility ahead. There are three main reasons why downside pressure on stocks could increase.

1. Insider Selling Raises Concerns

Recent data from Vickers Insider Weekly shows a significant uptick in insider selling relative to buying—a classic warning sign. When the sell-to-buy ratio reaches six or higher, it indicates a bearish outlook among corporate insiders.

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For the week ending July 25, that ratio surged to 10.47 for NYSE-listed companies, nearly double the bearish threshold. The week prior, it was even higher at 15.6. Nasdaq stocks showed similarly troubling numbers, with ratios of 5.5 and 9.3 over the past two weeks. Overall, across all exchanges, insiders sold over seven times more stock than they bought.

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Jasper Hellweg of Vickers Insider Weekly noted that insider sentiment is clearly negative with stocks trading near record highs. The selling is particularly aggressive within the banking sector. For instance, bank insiders recently sold $40 million worth of stock while buying only $330,000—a near-record imbalance. Companies like Morgan Stanley and BlackRock saw heavy insider selling, while even Berkshire Hathaway has been reducing its holdings in major banks like Bank of America and Citigroup.

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This is worrying because financials are cyclical stocks that tend to underperform during economic slowdowns. As banks are central to providing capital for growth, insider pessimism could signal broader economic weakness. Moreover, insiders are showing caution in other cyclical sectors, including industrials, tech, and consumer discretionary, while favoring defensive areas like consumer staples, healthcare, and real estate.

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However, it’s important to note that insiders are not always correct and often act early. The current rally could continue before any real downturn materializes. Additionally, some independent analysts, like Wells Fargo’s Mike Mayo, remain bullish on banks despite insider selling.

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2. Investor Sentiment Is Turning Excessively Bullish

Markets often peak when optimism becomes widespread. The latest Bank of America fund-manager survey indicates that cash holdings have dropped to 3.9% of assets under management—low enough to be considered a “sell signal.” The survey also shows heightened confidence in corporate profitability and a notable shift in recession expectations, with 59% of managers now dismissing the likelihood of a U.S. recession, up from 42% earlier this year.

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Similarly, cyclical stocks are trading at a record premium over defensive names, suggesting that investors have a high appetite for risk. While sentiment isn’t at extreme levels yet—the Investors Intelligence Bull/Bear ratio stands at 2.62, below the cautionary level of 4—complacency is evident. This makes the market more vulnerable to pullbacks, which contrarian investors would typically view as buying opportunities.

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3. Seasonal Weakness in September and October

Historically, the stock market experiences sharper declines during September and October than in other months, making them the weakest period for returns. Typically, the annual market low occurs around mid-October.

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There’s no definitive explanation for this trend, but some theories exist. One suggests that cooler autumn weather triggers a psychological shift toward preservation, leading investors to sell stocks and build cash. Another theory points to tax-loss harvesting, where fund managers sell stocks in these months to offset gains before the tax deadline on October 31. This pattern is more pronounced during years with substantial market gains, such as this one.

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Not every September and October leads to significant declines, but the historical pattern is strong enough to warrant caution.

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How Investors Should Approach This

For long-term investors, there’s little benefit to selling ahead of a potential pullback that may not occur. Strong consumer and corporate balance sheets suggest that a recession is unlikely in the near term. If markets correct by 5–10%, the better approach would be to maintain or even increase investments through dollar-cost averaging.

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Shorter-term traders, however, might consider locking in profits more quickly and holding extra cash to buy into any dip caused by seasonal weakness or a sentiment shift. With insiders selling aggressively and investors growing more bullish, the likelihood of volatility is elevated compared with recent months.

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In summary, while the market has enjoyed an unusually calm stretch, conditions are aligning for a possible pullback in the months ahead. Investors should remain level-headed, recognize the difficulty of market timing, and adjust their strategies based on their time horizon and risk tolerance.

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