Here comes the changing of the guard

As we head towards summer, tourists to Ottawa can look forward to the daily red coat changing of the guard ceremony on Parliament Hill. For Canadians, it is a must see. We give our nation's capital a nod this morning, not to recognize the pre-election vote-buying in Parliament by both the government (seniors-focused giveaways) and the opposition (millennial-focused giveaways). Instead, we would be remiss not to acknowledge another milestone achieved by Ottawa-based entrepreneurs, this time at Shopify (SH). 

Here comes the changing of the guard, not only in Ottawa put also in stocks. Cyclical markets such as Canada
and growth-oriented sectors may start to shine. Photo source Jamie McCaffrey

As our friends at Cantech Letter assessed, the debut of the Ottawa e-commerce innovator on both the NYSE and the TSX last week may well be a game changer for Canadian tech players having demonstrated they can hold their own against all comers. (http://bit.ly/1IW8dfw). Indeed, technology shares have helped Canadian stocks outperform U.S. stocks so far this year on a local currency basis. INK Canadian Insider (CIN) Index member Constellation Software (INK Edge outlook sunny; CSU) is up 46.3% so far this year, helping the Index advance 5.5% since December 31st. Both the INK CIN Index and the S&P/TSX Composite Index (+3.9%) have outperformed the S&P 500 Index (+3.3%) year-to-date.

In our first Market INK report of the year, we said that insiders were signalling that Canadian stocks should do better than the highly favoured U.S. equity market. In addition to the Technology sector helping to push Canada ahead, Health Care and Basic Materials stocks have also been doing some heavy lifting, with the S&P/TSX Capped Healthcare Index up 32.8% and the S&P/TSX Capped Materials Index advancing 7.7%. There have been no changes in our assessment in terms of the relative attractiveness between the two markets based on insider sentiment. Insiders continue to signal that more value is available up north. 

Meanwhile, our views have been eloquently echoed by James Paulsen, Chief Investment Strategist at Wells Capital Management, who has been a long-time bull on U.S. stocks. In a Friday BNN interview with Paul Bagnell, he suggested that we should see a global changing of the guard within equity markets, with areas such as Canada, Australia and emerging markets outperforming the U.S.  

Adding fuel to Canadian markets over the summer may well be the Consumer Cyclicals area. This week we are upgrading the sector to undervalued as our Consumer Cyclicals Indicator moved up to the 150% mark last week even as stocks in the group rallied. At 150%, there are 1.5 stocks with key insider buying for every stock with key selling. Insider buying in INK CIN Index members Shaw Communications (INK Edge outlook: mostly sunny; SJR) and Horizon North Logistics (INK Edge outlook: sunny; HNL) have helped to push the indicator higher.  

Financials also look set to give the Canadian market a hand. We are also upgrading it to undervalued as our sector indicator has moved up firmly over the 200% level this month. Unlike earlier in the year when REITs had the most positive impact on the indicator, now capital markets-oriented companies such as Clairvest Group (INK Edge outlook: sunny; CVG) are leading sentiment higher. This also represents a changing of the guard within the sector, from defensive real estate investment trusts to more growth-oriented fund operators, insurers and brokers. 

An earlier version of the post appeared Monday on INKResearch.com and on the TD Direct Investing website.

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