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The only indicator that has moved into negative territory is our Sentiment Indicator, which was reduced to -1, from +2 last October. As shown in the chart below, the Investors’ Intelligence Bull/Bear Ratio has moved from its very bearish level last October, when the ratio was actually negative (more bears than bulls in the surveys). The ratio is now at more normal levels. But another sentiment indicator, insider selling, has moved back to a record high level of over 20. This means that insiders at corporations are making 20 stock sales for every stock purchase. While that ratio is almost always greater than one (i.e. always more sellers than buyers), we had seen it drop to a low of under 2 times last October. So the bullish views of the market have increased and insiders have become aggressive sellers of stocks. While measures such as these are not always ‘timely’ market indicators, the moves did necessitate a reduction in our overall sentiment indicator.
Netting out all of the commentary above we still come up with a very positive outlook for stocks over the next few years. The big catalyst for further gains could come from a return of the individual investor to the stock market or from a potentially substantial asset mix shift from bonds to stocks. Over $1 trillion was added to bond funds in the past two years in the U.S., so if any portion of these funds start to move towards stocks, that could provide a lift to valuations. We think this should occur since stocks still look under-valued, particularly when looking at the historical relationship with bond prices. The chart below shows the UBS fair value model for the Canadian stock market, which we have used many times before. Canadian stocks have lagged the upward moves in most other industrial country markets since the lows seen last October. The level of Canadian stocks remains well below the current fair value range, which has been moving up since the economy is growing again, profits are rising and interest rates remain low.
The under-performance of the Canadian market this year (up only 3.5% year-to-date as this is written versus a gain of over 10% for the S&P500 index in the U.S.). Much of this has to do with the sectors that have been strong this year. The leading sectors in the U.S. so far this year have been Technology, Financials and Consumer Discretionary. Those sectors are less well represented in Canada, particularly in Technology where Research in Motion is Canada’s largest tech stock and has continued to deliver negative performance. Canadian banks, which acted well in preserving capital in the downturn, have lagged the recovery move in Financials elsewhere this year. The two most volatiile sectors in Canada, Energy and Basic Materials, have both lagged the recovery this year as investors worry about growth in China and the impact on global commodity prices if the slowdown becomes too pronounced.