Corporate insider sentiment for TSX-listed stocks is sinking, just as the Toronto market is finally picking up steam.
The Sentiment Indicator for TSX-listed stocks at INK Research, which monitors buying and selling of shares by directors and executives within their own businesses, has fallen to 93.2 per cent - its lowest point in more than a year. Anything below 100 per cent means there are more companies with key insider selling than buying.
But in addition to what insiders are doing, there is another signal that suggests recent TSX advances may have come too far, too fast.
Just as the INK Sentiment Indicator hit fresh lows, widely held TSX stocks saw a near-term peak in momentum. The relative strength index (RSI) of the iShares S&P TSX Capped Composite Index Fund hit 77.8 last Tuesday, notes INK Research.
The RSI is a measure of momentum which incorporates the ratio of the closing share price on up days versus the price on down days. Any reading over 70 is often considered an indication of over-bought conditions.
By the end of last week, it fell back down to near 66.
“The slowdown of insider buying in conjunction with a peak in market momentum signals that there are few bargains at current levels in light of the immediate risks ahead,” INK Research CEO Ted Dixon commented in a research note.
As a result, INK Research downgraded the TSX to “fair-valued,” a rating that suggests investors can expect real returns of about 7 per cent on average over the next year.
The latest insider trends should not be taken as a reason to run from the TSX, however. Mr. Dixon notes that absolute dollar values of insider selling in Canada remains restrained compared to historical norms. “So long as selling remains well behaved and the indicator remains above 80 per cent, the long-term outlook for Toronto will continue to be positive,” he said.
When broken down into components, INK Research continues to rate both the basic materials sector and the TSX Venture exchange as undervalued. But Mr. Dixon advises investors not to expect much from mining stocks over the next few weeks as speculation over the Fed’s future stimulus measures continues.
He thinks the sooner the Fed starts tapering its $85-billion-a-month in bond buying, the better for mining and gold stocks, given it should lead to pressure on the U.S. dollar.
“If the taper coincides with higher U.S. inflation, the U.S. dollar will likely be under pressure because short-term rates will be held low by the Fed,” Mr. Dixon said. “That would be a positive development for commodities.
“Of course, if the Fed tapers with no prospect of inflation in sight, commodities will likely remain out-of-favour along with their related stocks (however, they could still outperform relatively as other asset prices sink),” he added.Report Typo/Error