Will Canadian stocks reverse last year's trend and outperform U.S. equities in 2014?
It's a question many are pondering as the year gets underway. Corporate insider activity appears to suggest it may be best to place your bets on stocks that trade north of the 49th parallel.
The U.S. indicator at INK Research, which monitors buying and selling of shares by officers and executives within their own companies, hit a low of 22 per cent in early November, at which point there were almost five U.S. stocks with key insider selling for every one with buying. It's been hovering just above that level ever since, a clear signal that insiders think the U.S. stock market is overvalued.
"Although U.S. stock momentum could well continue longer than expected, insiders are indicating the risk is just not generally worth the potential reward," commented Ted Dixon, the CEO of INK Research.
He suggests insiders are being prudent. By some measures, price-to-earnings multiples are running above the historical average, and U.S. credit growth as measured by loans and leases of all U.S. commercial banks has averaged only 1.5 per cent since the end of the last recession. That compares with average credit growth of between 5 per cent and 12 per cent during previous economic expansions over the past 40 years.
"The bulls will argue that weak credit growth will simply encourage continued easy money which will push stocks higher. That indeed was the winning formula for 2013. But insiders are not betting it will work again. At this point for the U.S. market, it may be a good strategy to keep some cash on the sidelines and see how insiders react to any market pullback," Mr. Dixon said in a research note.
It's a different story in Canada, where valuations appear less expensive and Canadian insiders are signalling that TSX stocks are fairly valued.
INK's Toronto stock market indicator remains near 100 per cent, where the number of stocks with key insider buying is equal with those selling.
Canadian energy insiders are generally negative right now, with insiders signalling that many stock prices have likely factored in a lot of good news in the sector. By contrst, insiders are snapping up beaten-down mining shares. INK's basic materials indicator is close to 300 per cent - signaling there are three stocks with key insider buying for every one with selling.
"This may well be the year when either inflation finally surfaces after all the years of central bank money printing or that the Fed and European Central Bank turn their policy guns aggressively to fight deflation risk. Either scenario could help mining stocks," said Mr. Dixon.
Insiders are also still in love with Canadian REITs. INK's REIT indicator is at 350 per cent, "and is behaving in a way that suggests REITs may well have put in a long-term bottom late last summer," said Mr. Dixon.
REITs fell out of favour last year as long-term U.S. interest rates spiked higher, which threatens to squeeze margins and send investors to the yields offered in the bond markets.
A rise in inflation could benefit the REIT sector, however, given that residential and other REITs with short-term tenants are usually able to respond by raising rents, Mr. Dixon noted.