Interest among corporate insiders to buy stocks listed on the TSX is on the wane.
The INK Sentiment Indicator for TSX-listed stocks is currently hovering near 85.2 per cent after a steady decline from above the 100 per cent level at the start of this year. An indicator level below 100 per cent means there are more stocks with key insider selling than buying.
"Insiders seem to expect a stormy spring," summed up Ted Dixon, CEO of INK Research, which tracks the buying and selling of shares by officers and directors within their own businesses.
This may not come as a huge surprise, given that insiders tend to be early to market moves. The S&P/TSX composite index has generally been in an uptrend this year and remains close to a more than five-year high. Insiders may be signalling there's less value to be had as stocks gain.
But there may be more going on here. Insiders in the Canadian energy sector, for instance, are taking money off the table at an aggressive rate, notes Mr. Dixon. Over the past 60 days, officers and directors have sold a collective $136-million worth of directly held energy shares into the public market.
Two years ago at this time, there was a similar burst of selling in the energy sector, totalling $110-million. It turned out to be a useful warning: the S&P/TSX energy index subsequently fell 18 per cent before recovering.
INK's energy sentiment indicator for the TSX currently stands at 126 per cent, indicating there are still slightly more stocks seeing insider buying than selling over the last 60 days. But that's well off a reading of above 160 per cent at the start of this year.
Spring is a seasonally weak period for oil and gas stocks, given that investors often anticipate lacklustre second-quarter results as thawing ground conditions make it difficult to move oil and gas rigs. Demand for natural gas and heating oil also tends to go down this time of year.
Insiders, however, seem to be worried about more than just seasonal factors this time around.
"Given the impact of spring break up on oil and gas field operations, we would expect to see some selling in both production and exploration and oil service stocks. However, two of the top five stocks with selling over the past month are pipeline companies TransCanada and Enbridge," said Mr. Dixon in a reserch note to clients. "Such insider behaviour is consistent with a growing risk that a tighter Fed could slow down the flow of investor cash into the interest-sensitive pipeline group."
Last week, Federal Reserve chair Janet Yellen suggested the central bank could hike interest rates as early as spring of next year, sooner than many had expected. The Fed is also not veering from its plans to reduce its monthly bond purchases, a process known as quantitative easing, at a steady clip of $10-billion per month.
The Fed actions are putting pressure on bond prices, sending yields higher, and making dividend stocks such as pipeline companies comparatively less attractive.
Another notable finding of recent insider transactions has been a deterioration in the appetite for junior mining stocks. Insider dollar selling --the dollar value of shares sold by insiders -- on the Venture Exchange, where most of these companies are listed, has moved up significantly. Mr. Dixon notes that suggests the current rally in juior mining stocks may be in a final stretch before a pause or short-term correction.
"Overall, insider signals suggest prudence is warranted in the current environment. Investors may be well served by keeping aside some cash or implementing some broad hedging strategies," said Mr. Dixon. "Basic materials is the only sector which has an undervalued insider sentiment reading, thanks primarily to mining stocks. However, even in this group investors should not count on momentum to lift all boats.
"Across the board, insiders are becoming very picky with respect to the stocks they are buying. That suggests to us that value strategies will be key to generating positive returns over the next few months throughout the Canadian market."
Darcy Keith