Insiders selling consumer cyclicals

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Amid warnings that Canadians must slow down their spending sprees as debt levels reach record highs, sentiment among corporate officers and directors in the consumer cyclical sector is starting to turn bearish.

INK Research, which monitors insider buying and selling of shares, says its consumer cyclicals indicator is now at 72 per cent. That's down from a reading greater than 100 per cent at the start of this month, and around 200 per cent in early September.

A reading of 100 per cent suggests there are an equal number of stocks with insider buying and selling. The further below 100 per cent, the more there are sell transactions versus buys.

"Once an indicator dips below 80 per cent, it usually is a signal that the bulls have left," INK Research analysts Ted Dixon and Henry Chan said in a research note today. "Some directors and officers in the consumer cyclical area are starting to have some doubts."

Consumer cyclical stocks include firms that rely on selling goods or services that enjoy higher sales when people are feeling good about the economy and their overall financial situation.

Canadians have been bombarded with messages that debt levels have reached record levels and are heading towards misery when interest rates finally rise. And higher rates may not be all that far off. The Bank of Canada recently suggested the economy could hit full capacity at the end of 2013, a scenario that would inevitably require tighter monetary policy.

"As debts mount, wallets are more likely to stay in the pockets and purses of Canadians. So, it is probably no coincidence that as debts moved into record territory, our insider sentiment has pulled back," the INK Research analysts said. "As such, we are downgrading (the sector) to neutral from undervalued."

Overall, the INK Sentiment Indicator for TSX-listed stocks this week rose modestly to 111.2 per cent from 104 per cent a week ago. Neither buyers nor sellers are gaining the upper hand, but insiders are biased towards the bullish side when looking over a horizon of one to two years, the analysts said.

The sentiment indicators are derived by taking the number of stocks with buy-only transactions over the last 60 days, and dividing that with the number of sell-only transactions. The indicator ignores stocks that have both buying and selling in an effort to give a more accurate reading.