Weekly Sound Bite: Looking for signs that the global economy may surprise on the upside

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For the past year or so we have been getting used to bad news on the world economy with the IMF, OECD, and the Fed taking a downbeat view on world growth, particularly China. However, North American insiders have not been so negative recently. In particular, there has been positive insider sentiment towards the globally sensitive US Basic Materials sector (includes things like steel, paper products, chemical products plus mining). Our 60-day INK US Basic Materials Indicator, which tracks the number of stocks with key insider buying versus the number with selling, surged to over 150% in February. At that level, there are 1.5 stocks with key insider buying for every one with selling.

Our insider sentiment indicators set new highs as stocks sold off earlier this year.

Canadian insiders are also very positive towards mining as seen in our latest subscriber monthly Top 40 report. No fewer than 23 miners made the list, which even for the resource heavy Canadian market is a huge number.

It is unlikely that this positive attitude of insiders towards such a cyclical area of the market would be so upbeat if insiders as a group thought the global outlook was lousy. Consequently, I am beginning to believe that global growth could surprise the consensus on the upside.

Since January, in my weekly commentary on Roundhouse radio, I have been highlighting three key themes:

  1. Gold and gold stocks looked poised to rise
  2. Canadian stocks looked set to outperform the US market
  3. Both of the above depended on the U.S. Dollar Index staying below 100.

So far, gold stocks and Canadian stocks have outperformed. Thanks to some help from a dovish Fed, the greenback has cooperated with the Dollar Index failing to move above that critical 100 mark. This is a major development because a weaker greenback takes the pressure off China to devalue which in turn reduces stress on its regional trading partners. Certainly, the last thing the world economy needs right now is a round of competitive devaluations. Moreover, with the threat of devaluation receding, Asian economies in particular should enjoy stronger business and consumer confidence. That could very well translate into stronger growth.

So what do we look for going forward to get a sense if better times are ahead?

In the US, I will be watching to see if the Materials Select Sector SPDR (XLB) can continue to outperform the S&P 500. This ETF is comprised of economy and export sensitive companies. If it continues to be a market leader, that could be telling us that global trade is starting to regain momentum.

In Canada, watch to see if the S&P/TSX Composite (TSX) Index can continue to outperform the more defensive INK Canadian Insider (INKCIN) Index over the next few weeks. The TSX is more weighted to cyclical resources than the INKCIN which outperformed the TSX significantly last year in a down market. 

The INKCIN will be re-weighted in May, a process which takes into account insider sentiment along with valuations and price momentum. It will be interesting to see if it leans more cyclically. If it does, we will have another insider signal that global growth is gaining ground.

Finally, watch the yield on the 10-year Treasury Bond. If it fails to fall below 1.60%, that could clear the way for a test on the upside. After all, we do not need a Fed rate hike to see the yield curve steepen. A belief that either global inflation or nominal growth rates have bottomed could do the trick.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time. If you missed the live broadcast for this week, catch the replay here: http://bit.ly/1NaRAMt.

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