Second half outlook: Insiders cautiously bullish towards Canadian stocks

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As we make our way through the second half of the year, insiders remain cautiously bullish on the Canadian market. This can be seen by looking at trends with our INK Canadian Insider (CIN) Index rebalancing process.

We are at the halfway point to the next semi-annual rebalancing of the INK CIN Index. On November 17th, we will remove Index stocks that do not have a sunny or mostly sunny INK Edge outlook ranking (based on the equally weighted V.I.P. criteria of value, insider commitment, and price momentum). Leavers will be replaced with the highest ranked stocks that are not already Index members. At the same time, all 50 stocks in the Index are set to equal weight. The benefit of rebalancing to equal weight is automatic profit-taking in the best performing stocks and simultaneously upping exposure to stocks that have been lagging but still have an attractive INK Edge outlook. Visit our indexing page to read more about our rules-based INK Edge ranking process: https://index.inkresearch.com/.

At the halfway point, we like to see if insiders are significantly shifting their posture from the previous rebalancing: in this case, on May 19th. At the time, insiders bet heavily that the protectionist cloud hanging over the market would lift by favouring forestry and auto-parts related stocks. However, they also hedged their pro-growth positions with stakes in Utilities and defensive Financials such as REITs which would both likely benefit should long-term interest rates remain low.

If we were to start the Index from scratch today, insiders would continue to favour forestry related and other Basic Materials stocks, and Energy would get a small boost to a 6% allocation from 4%. Financials would be the big winner with insiders moving into market and economy sensitive names such as ECN Capital (ECN), Canaccord Genuity Group (CF), and Sun Life Financial (SLF). Meanwhile, they would reduce their defensive interest-rate positions slightly by dropping Utilities to 2% from 4%. On balance, insiders right now appear slightly more bullish on the Canadian and global economies and slightly more bullish on Energy compared to May.

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The shift is subtle and suggests an improving assessment of the reward-to-risk trade-off in the Canadian market. Generally, Canadian stocks have struggled year-to-date with the mid-cap oriented INK CIN Index up slightly at 0.49% while the mid-cap oriented S&P/TSX Completion Index is down 2.07%, and the broader S&P/TSX Composite is off 1.40% (all price returns).

The rebalancings of the INK CIN Index provide a window on how insider sentiment is shifting towards the universe of stocks that are large enough for institutional investors. Our Top 40 Stock Report is more broadly focused and includes smaller names that do not typically attract the attention of big players due to low liquidity.

 

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In our August Top 40, we found that insiders are generally boosting their exposure to Basic Materials. The report, which is included in Canadian Insider Club membership, has a 32.5% exposure to the sector, up from 22.5% last month. The boost in Basic Materials stocks is taking place as the copper-gold ratio has been climbing. As I discuss in my interview with Howestreet.com's Jim Goddard, the Canadian market has done well over the past 5 years when the ratio has been on the rise. You can listen to the interview below.

While insiders are sending positive signals about Canadian stocks for the second half of the year, the same cannot be said for the United States market. In particular, we are seeing some warning signs courtesy of banking insiders. For only the third time since the end of QE, our Banking Indicator has moved notably below the 50% mark. Interestingly, the other two instances also took place this year, first in early January and later in early March. In both cases, we witnessed a subsequent drop in the SPDR KBW Bank ETF (KBE*US).

The KBE ETF remains well off its March peak of $46.995. The inability of the group to challenge that multi-year high combined with sagging insider sentiment serves as another warning sign that one of the key factors supporting the great QE-driven momentum rally, namely tranquility, may be about to be replaced with greater volatility.

Perhaps any such a volatility increase will remain contained within the US banking sector. The one problem with that assumption is the behaviour of insiders outside the banking group who are taking money off the table in notable numbers.

This post draws on material from the earlier versions of the Market INK, US Market INK and August Top 40 Stock Reports which have already been distributed to clients.

Listen to or download Ted Dixon's second half outlook interview with Jim Goddard below. You can also catch it on Howestreet.com's YouTube channel.

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