American insiders confirming the Canadian reflation bias

Every week we provide an American insider overview for our subscribers at INKResearch.com and TD Direct investing. Below I have incorporated the commentary from this morning's INK Research American insider article which appeared before the open. Today's commentary is particularly relevant for investors in the Canadian market as insiders south of the border appear to be confirming the tilt towards growth-oriented stocks we are seeing in Canada.

Indeed, so far this morning the reflation theme is in full gear with the two most economically sensitive US sector ETFs combined, the Energy Select Sector SPDR (XLE*US) and the Materials Select Sector SPDR (XLB*US), outperforming the broad market. While we no doubt expect a pullback at some point, the reflationary trend seems to be gaining steam. That could mean further relative pain ahead for defensive and popular yield plays including stocks in the Utilities sector.

Investors pay close attention to stocks in the Utilities sector because of their low correlation with the broader market and close relationship with government bonds which normally do well in a slow economy. Most importantly, if Utilities start to outperform the broad market, it could mean trouble ahead. In 2007, the Utilities SPDR ETF (XLU*US) began to outperform the SPDR S&P 500 ETF Trust (SPY*US) just as America was entering a recession.

As it stands so far this year, the XLU is the worst performing major sector ETF. Consequently, the chances of an American recession at this point seem slim.

Instead, with US long-term rates rallying, stocks in the Utility sector have been struggling. The XLU is down almost 10% year-to-date. Looking ahead this summer, insider signals suggest that the downward correction still has further to go. While our US Utilities Indicator appears to have recently bottomed, the climb back has been sluggish. The indicator has only managed to make it back to about 25% at which point there are still four stocks with key insider selling for every one with buying.

That said, it would not surprise us to see Utilities stocks rebound as we head into next week's Federal Reserve meeting. The XLU is currently trading at the lower end of its Bollinger range, and has an RSI of just under 30. Both these technical signals suggest an oversold situation.

 Utilities SPDR (XLU*US)

Meanwhile, the economically-sensitive Basic Materials sector continues to see decent insider sentiment with our sector indicator holding above 50%. While we still have the group at a fair-valued reading, on a relative basis in the US market it remains one of the more attractive areas. Only pro-cyclical Energy and Financials stocks have higher sector indicator levels.  

On balance, American insiders are signalling that within the US market, economically-sensitive stocks, banks, and insurance companies are the places to be. Of course a word of caution is always in order, particularly when heading into a Federal Reserve policy meeting. While a US recession may not be in the cards right now, that does not mean one cannot happen. If the Federal Reserve starts to raise rates this year, investors will indeed want to see how Utility stocks and insiders react.

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