Head fake or sea change?

We are starting the New Year off with two encouraging developments for Canadian mid-cap oriented stocks. Not only has the INK Canadian Insider (CIN) Index outperformed the S&P/TSX 60 Index over the past month, but our INK Indicator is also showing potential signs of peaking, something that tends to develop near a base in stock prices.

Last spring, we were head faked by insider enthusiasm towards global economy sensitive stocks. Insider bullishness lead us to believe we were in store for a late cycle rally that should have benefited Canadian stocks. However, by early summer we recognized and wrote about warning signs starting to appear in Canada and the United States thanks to rising trade and monetary policy uncertainties. By mid-July, we warned about US stocks, and by mid-August we concluded that investors were heading for the relative safety of big-cap stocks in Canada. We became resigned to the idea that the INK CIN Index would struggle until risks of trade wars and fed tightening had subsided.

So, with the experience of 2018 fresh in our mind, we are reluctant to jump to the conclusion that the bear market in Canadian stocks is about to come to an end. Instead, with both positive developments being preliminary in nature, we remain in watch and see mode.

Mid-cap stocks as tracked by the INK Cdn Insider Index outperforming bigger names

It is encouraging to see the INK CIN Index beat the S&P/TSX 60 as it signals that most of the bad news has been priced into mid-cap growth-oriented stocks relative to perceived safer big stocks. However, we want to see this outperformance continue a bit while longer, preferably on the upside, to provide some confidence that investors are beginning to warm up to the global growth story again.

We still need a bit longer to confirm a base in stock prices

We also want to see a clear peak in our INK Indicator to confirm that market momentum has switched from stocks getting cheaper to stocks getting more expensive. The optimal entry point to buy is at the point of maximum gloom. We may well be close to maximum gloom, particularly in the Energy sector. Unfortunately, this lack of visibility in terms of a turnaround in investor sentiment is the tricky part of avoiding a head fake while successfully identifying a base in stock prices. For an example of a recent head fake see Double trouble for cannabis stocks? Based on our signals, momentum appears to be rolling over positively for stocks, but we need a few more days or possibly weeks to confirm this development.

In what could be a boon to stock pickers and value investors, there is an alternative scenario that we are in a new period of investing where there is no major broad breakout in stocks for a long time. Instead, bull markets may emerge in one corner of the market, while bear markets rage in another. In my view, such a scenario could be consistent with the Stephen Roach conclusion that new Fed policy could finally result in asset prices being driven by fundamentals instead of easy money. This would have implications not only for stocks, but also high-flying Canadian real estate prices given the Canadian bond market is more-or-less tied to the hip of US Treasurys.

As we start the New Year, it is not entirely obvious what could help establish a sustainable turnaround in investor appetite for stocks to ignite a bull market in global equities. The base case would be for investors to start anticipating Federal Reserve easing on the back of deteriorating growth and inflation numbers. However, if Mr. Roach is right, it will take more data than just a lousy regional Fed survey to get us there.

Traditional decoration for the New Year in Japan

I am writing this from Japan where were visiting family for Sh??gatsu, the traditional Japanese New Year festival. I would like to thank all our subscribers and website users for their support in a challenging 2018 and wish everyone a Healthy, Prosperous and Happy 2019!