With Trump elected, will insider sentiment continue to move higher?

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American insiders took advantage of falling share prices in the first week of November to increase their buying. Our INK US Indicator moved up to the 37% level, up from 30% last week. At 37% there are 37 stocks with key insider buying for every 100 with selling. Most encouraging was the uptick in sentiment among Industrials insiders. Our Industrials Indicator was back above 20% on Monday. Typically, when the indicator is below the 20% mark, the sector experiences weakness over the following 6 months.

The fact that election uncertainty was in its dying days may have also encouraged insiders to open their wallets. The critical question now is: how will they react to the Republican victory on election night?

If stocks sell off significantly, we would expect to see our indicators spike. In such a scenario, insiders would be signalling that stocks are overreacting to the unexpected news of Trump's victory and that bargains are emerging.

In contrast, if our US Market indicator falls along with stocks, it would signal that insiders do not believe that stocks are reflecting the underlying risk in the economy. Under such a scenario, investors would probably be better off taking a wait and see approach in cash rather than starting to hunt for bargains.

The same goes for our sector indicators. A rising indicator in a falling market is the type of reaction we would normally expect. 

Our indicators have the most value during periods of high market risk. With a high degree of uncertainty surrounding the policy direction and priorities of a Trump presidency, we are clearly in such a period. At this point, our expectation is that insiders will do the same thing they did in the great financial crisis - buy stocks if they sell off. If they do not, a high degree of caution would be warranted.

There is also an optimistic scenario that could very well emerge: a rising indicator combined with a rising market. Once investors shake-off the initial election surprise, US stocks could rebound on the expectation for tax reform and infrastructure spending. If insiders buy the rally, it would be the best outcome for the bulls and signal potential new highs for the US equity market.

This post is from the November 9th Market INK report. Our US Indicator is updated daily on InsiderTracking.com.

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