Insider activity suggests rally in TSX consumer cyclicals is nearly over

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The high-flying consumer cyclicals sector of the TSX could soon be coming in for a landing, based on the latest trends gleaned from buying and selling activity among insiders.

The S&P/TSX consumer discretionary index is up nearly 30 per cent year to date, despite a rather flat year for Canadian equities overall.

Insiders have been taking profits, and investors may want to consider following their lead. The consumer cyclicals indicator at INK Research, which monitors buying and selling activity of officers and directors within their own businesses, is at 75 per cent. That means there are 1.25 companies with key insider selling for every one with buying over the past 60 days.

The 100 per cent level is the dividing line: a reading above that means there are more companies with key buying than selling. Just this past spring, that same indicator was flirting with 200 per cent, meaning there were two companies with key insider buying for every one with selling. But lately it's been below 100 per cent and, most recently, has flattened out around the 80 per cent level.

"The flattening of our indicator below 100 per cent over the past three weeks suggests that insider selling is getting tired," commented Ted Dixon, CEO of INK, in a research note. "Given the extended run of insider profit-taking in the group, we are nearing the point when investors who have profits in the sector may want to start following insiders out the door."

Insiders are notorious for taking profits a little too early, before stock prices have reached their peak. They can still do very well, however, in part because they were likely granted stock rights at very attractive prices or otherwise got in early.

Elsewhere, insiders are showing waning enthusiasm to buy stocks in the industrials sector, which – having risen 13 per cent year to date – has also outperformed the broader S&P/TSX composite index. INK's industrials sentiment indicator is at 115 per cent, down from roughly 150 per cent a few weeks ago.

"Our industrials indicator has been slowly fading from bullish levels over the past month and is now challenging recent lows," Mr. Dixon said. "Given waning insider enthusiasm to buy shares, we are downgrading the sector to fair-valued. A fair-valued reading suggests a return broadly in line with the overall market during the next 12 months."

INK's sentiment indicator for the energy sector has also come off its spring highs of well over 300 per cent. It's now at 261 per cent.

"Insiders particularly in the exploration and production group have pulled in their bets signalling the sector is due for either a period of high volatility or limited returns," said Mr. Dixon. He thinks the outlook is somewhat better for the energy services stocks within that subgroup, however, in the short term.

Insider buying is also coming off its highs in the basic materials sector. But unlike industrials, sentiment remains firmly in bullish territory, he suggests.

"Our basic materials indicator is still above the 500 per cent level," where there are five stocks with buying for every one with selling, Mr. Dixon commented. "Many of the stocks being snapped up by insiders are junior miners on the Venture Exchange."

"While the heightened level of insider buying suggests bargains remain in the junior mining space, investors interested in this high risk area should start to look at opportunities now. Insider buying is well off its peak which means the window of opportunity to enter the basic materials sector and especially junior miners at undervalued levels may soon be closing."