Insider trading points to rally in mining stocks

Mining stocks gained upward traction in September, goosed by optimism over the latest stimulus measures from the world's central banks.

But will the sector continue to post gains as the end of the year approaches? The latest insider stock trades suggest yes.

Since the Federal Reserve announced its latest round of quantitative easing on Sept. 13, the S&P/TSX materials index is up 2.4 per cent, while the junior-miner heavy TSX Venture exchange has risen 3.2 per cent. Note that the energy sector hasn't fared nearly as well, losing 2.4 per cent over the same time period.

INK Research, which monitors insider buying and selling of shares, believes the latest activity by corporate executives and directors indicates the basic materials sector may be among the most undervalued on the TSX.

INK publishes a "sentiment indicator" for sectors – 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). A reading of 100 per cent suggests there are an equal number of stocks with buying as there is selling.

The materials sector stands at 270 per cent today, meaning there are 2.7 times as many stocks with buying as selling. The only other sector with a higher percentage is telecommunications, at 600 per cent. (The telecom indicator tends be be very volatile due to the small size of the sector in Canada.)

Energy has a sentiment indicator of 183 per cent. That's still a bullish reading, but well below that of basic materials.

"Although our basic materials indicator has been declining over the past few weeks, that is to be expected in the face of rising share prices," INK Research analysts Ted Dixon and Henry Chan said in a note. "At this point, we still see more excitement among the miners than oil and gas drillers."

That, in part, may be because the North American energy sector is facing higher supplies, thanks to technological advances in drilling, at a time when global demand is cooling. But faltering oil prices is good news for miners, given it lowers their input costs for fuel.

"In addition, miners appear to have monetary policy on their side," INK Research said. "While the oil price may have peaked for the time being, the U.S. Federal Reserve's balance sheet is still growing, and the assets of the European Central Bank also look set to climb. With a peak in monetary stimulus likely still years away, commodities that face relatively challenging supply constraints and their producers may attract more speculative money than those in greater abundance. Such dynamics would support the continued outperformance of the basic materials sector over energy.

"Perhaps it is no wonder why basic materials and Venture insiders remain particularly upbeat."