Market Outlook April 21, 2014

North American markets were closed on Friday, but they’re open today.

Inflation has jumped up from 1.1% to 1.5% (headline), but interest rates have dropped slightly. Inflation is backward-looking, whereas interest rates (and the stock market, to an even greater degree) are forward looking. Inflation is at a level much closer to the Bank of Canada’s target rate (2%), which may set at ease anyone who was worried about deflation. It also reflects positive economic activity. However, interest rates will rise much higher before I’ll agree that the economy is very strong.

Stocks present far better momentum than bonds. Even though the stock market has been relatively flat over the past two months, it’s up 5.26% over the last 50 days, compared to bonds, which are 0.07% lower than 50 days ago. A balanced portfolio is most likely to benefit from being overweight stocks at this point. A word of caution: it will require patience to benefit from being long equities in a volatile market.

Comparing the various asset classes, Brazil (EWZ) and emerging markets (XEM) continue to enjoy the greatest momentum. Canadian stocks, although not in the lead, still appear attractive and outshine American stocks for the present. I’m experiencing the same thing in my personal portfolios.

Market Outlook April 14, 2014

Stocked dropped over the past week, but maintain their advantage over bonds. Within stocks, Brazil (EWZ) stocks are doing particularly well, followed by Hong Kong (EWH) stocks. In Canadian dollars, emerging markets (XEM) have the momentum advantage.

Market Outlook April 7, 2014

I was away on holidays the last two weeks, and boy did I miss out on a shift in the market. The momentum stocks that I own, VRX and DGC, both dropped in price by about 10%. Ouch. That’s one drawback to momentum investing. Next time, I should probably just sell the stocks before going away from internet access for that long.

Interest rates rose over the past couple of weeks, but the posted 5-year mortgage rate fell. That means bond prices fell, but house prices are likely rising. But because bond prices have been falling, stocks show much better momentum and appear more attractive.

Of the various asset classes that I compare, Brazil stocks (EWZ) have the best momentum this week (as they did last week, but I wasn’t here to notice). Gold stocks did really well for a couple weeks, but it was very short-lived. As you might guess, the emerging markets (XEM) in general are doing well; Canadian small caps (XCS) also have good momentum, but both are well behind Brazil.

Market Outlook March 17, 2014

The past week wasn’t particularly good for stocks. Equities fell by half a percent, while bond values rose by half a percent. As would be expected, bond yields fell somewhat. The surprise, for me, is that gold (IGT) continued to rise, and presents the best momentum among the various asset classes that I analyse. That is a fairly defensive signal and doesn’t bode particularly well for stocks. Interestingly, real estate has also risen, so it may be a case of inflation worries. Canadian and US small caps are not far behind and probably continue to present opportunity for those who own them.

Despite the short-term slow down in equities, they maintain a clear advantage over bonds. A balanced portfolio should continue to benefit from overweighting equities. And although gold has good momentum, VRX (which I will continue to own) and MG are individual stocks that have about double the momentum. Owning individual stocks has worked better for me, so far, than owning ETFs, in the small portion of my portfolio that I use the momentum strategy with (registered funds that don’t produce cash).

Market Outlook March 10, 2014

Mortgage rates (Bank of Canada official = 4.99%) have fallen 25 bps (1/4%). Other interest rates have risen slightly, but lower mortgage rates could translate into higher property prices, all else being equal. This could potentially have a wealth effect and translate into an increase in spending (and investing). This should be supportive of corporate earnings which will be announced over the next few weeks.

Comparing various asset classes, small caps still outshine the others, with US small caps (IWM) in the lead, followed by Canadian small caps (XCS). Gold also has good momentum, but headlines say that commodity prices are falling (over what timeframe?) and I would hesitate to bet too much on gold while stocks are doing okay. To be clear, stocks have much better momentum than bonds, and a balanced portfolio should overweight stocks.

I shy away from individual small caps because of their volatility, so in my registered accounts where I have a single momentum-based position, I continue to own VRX and, in my US$ account, WAG.

Investment Ideas

Canadian Large Caps

Valeant (VRX) has done really well for me as I’ve owned it over the last four weeks. In that time, it has increased 5%, almost an entire year’s worth of growth.

Cameco (CCO) is a uranium producer. The share price has been rising steadily over the past six months, but really jumped late last week. This has produced interesting momentum and it could continue to perform well in the near future.

Enerplus (ERF) is another interesting name that I’ve been watching for a while. I kick myself for watching it instead of owning it, because it pays an attractive dividend (currently yielding almost 5%, down from over 7%) and the share price has continued to rise. The reason I couldn’t pull the trigger is the P/E, which is presently over 90. It’s really important to me to see that earnings are supporting the payout.

US Large Caps

Walgreens (WAG) has the best momentum of the US large caps. I bought it a few weeks ago and it has gained 2%. It operates over 8200 drugstores in 50 states, and offers consumer goods, pharmacy and health and wellness goods and services. The stock price rose considerably during the first half of February, although it has performed well during the past two years.

Halliburton (HAL) is an oil and natural gas exploration and development company. The share price has been volatile, but has performed well over the past two years. It is supported by rising oil prices, which may or may not continue.

Disney (DIS) produces films and tv shows and runs theme parks. Their momentum is nearly tied with HAL, which surprised me because they haven’t shown up on my radar before. It appears that the market has looked favourably upon the acquisitions of the Lucas enterprise. The share price has doubled over the past three years and it’s as high as it’s ever been.

Market Outlook March 3, 2014

Stocks went virtually nowhere over the last week, while bonds rose in value and interest rates fell slightly. What does it mean? It causes me to worry a little, because of the RRSP deadline which has been driving prices up. I expect prices to fall back over the next week or two in a small correction of 5% or potentially as much as 10%. But for the moment, stocks continue to outpace bonds easily.

Canadian small cap stocks (XCS) maintain the highest momentum among the asset classes that I watch, with US small caps (IWM) not too far behind.  Large caps (XIU, SPY) are not far behind, along with gold (IGT). If stocks suffer a correction, gold may offer some protection, but I wouldn’t choose the precious metal to create value.

Top line inflation (1.5%) isn’t high, but it has been rising somewhat. GDP is also reasonable at 2.3% (for Dec). I look at those numbers and, although they are backward looking, they give some hope that the economy has strengthened somewhat. Is it enough to sustain the market at its highest point in four years? Will the market be able to push higher? It will eventually, but possibly not for a couple months, depending on the Q4 and Q1 corporate earnings reports which are due out in a few weeks.

Market Outlook February 24, 2014

The last week was a very profitable one for investors in the stock market. The TSX rose 1.23% in just five days, reaching almost to the highest level since the crash of 2008 – 2009. This is what technical traders refer to as resistance. Will people be willing to drive the price up above the previous high? Time will tell, but to me the indicators look supportive. I wouldn’t be surprised if we saw a new high this week. In fact, this is a development I’ve been awaiting for quite some time. My greatest caution lies in the fact that this is the final week for RRSP contributions in Canada, which often increases demand for investments and drives up prices. Even if this week appears likely to be positive, chances are that purchases will drop off in the beginning of March and prices will begin to fall back. It’s hard to say what will happen after that.

Stocks are in favour over bonds by quite a margin, and balanced portfolios should certainly prefer stocks at this time. Inflation has increased somewhat, although it is still below the 2.0% target of the central bank. Interest rates have barely moved. Those indicators are also supportive of stocks, although it doesn’t appear that the economy is particularly hot.

Of all the asset classes (ETFs) that I watch, Canadian small caps (XCS) present the greatest momentum. Gold is close behind, followed by US small caps. As has been the case consistently over the prior year, certain individual stocks are performing better than ETFs and I continue to own (and be very pleased with) Valeant (VRX).

Market Outlook February 17, 2014

This past week was very constructive for stocks, with the TSX rising just about 2%. Stocks show as much advantage over bonds as they have any time over the prior three years. (April 2011 had a better reading.) For a portfolio that’s balanced between stocks and bonds, it is clear that stocks should be overweight at this point. The last month has been pretty flat, but the period that began six months ago has been profitable. I’m beginning to expect that stocks will continue to do well until May, at which point “sell in May and go away” may once again be good advice as the economy struggles to find its feet.

The strange thing is that gold (IGT) has suddenly shot up in price, which has pushed its momentum to the top of the heap. Its momentum isn’t very high, it showed a jump over last week, and it’s only ahead of the second place asset class by a fraction. I would look at least as favourably upon Canadian small caps (XCS), which show almost as much momentum, but have been more consistent over the recent past.

Instead of rotating between asset classes, I continue to own Valeant (VRX), based on its momentum, which is stronger than any of the ETFs that represent an asset class. Having said that, it’s made me just 1% over the past couple weeks. It may be doing okay, but the markets feel choppy, which translates into the risk of missing the top and losing money if this starts to slide back down. So far, so good.

Market Outlook Jan 27, 2014

Oops. I missed a bunch of weeks over the winter holiday, but I’m getting back on track.

Over the period that I missed, since Dec 13, 2013, the TSX has risen a little over 3%. Actually, I rose more than that, but fell back over the past couple days. I’d say that 2014 is off to a good start for stocks. My prediction for the year: the market will move both up and down, with slightly more up than down, with the possibility of a correction in September or October. To be fair, that’s my prediction every year.

The market continues to favour stocks over bonds by a wide margin. The recent pullback has only reduced the advantage of stocks from exceptional to clear. Having said that, certain individual stocks appear to be doing well while the broader indices are struggling. In comparing the different ETFs that I use for proxies of asset classes, only Canadian small caps (XCS) have very good momentum. Whereas emerging markets were doing well at the end of last year, Brazilian and (to a lesser extent) Chinese stocks are suffering. Almost tied with Canadian small caps is gold (IGT), and in second place are US small caps and bonds. The outlook, therefore, is somewhat cautious.

In the six weeks that I wasn’t paying attention, interest rates have barely moved. Inflation has picked up (from 0.7% to 1.2%), implying that the economy is ticking along. The Christmas shopping season probably helped. I’m not sure if the weather is the same everywhere, but it’s been relatively cold this year in Calgary, which makes shopping attractive as a warm, indoor winter activity. It will be interesting to see if that translates into profits for retailers when Q4 and Q1 results are announced in a few months.

Looking back over 2013, the US market (SPY) has clearly outperformed the TSX (20% vs. 6%). That would only change, I believe, if there were a new bull market in resources and commodities, which seems unlikely given that we’ve just experienced a 12 year bull and the cycle is more likely to reverse before beginning again. That doesn’t mean Canadian companies will struggle, but the TSX index isn’t likely to keep up with the S&P 500. Another indication that the bull market in commodities is running out is the -15% result for gold (IGT).

Given that certain Canadian large caps continue to perform well (I’ve been very happy with Gildan (GIL)), I will own an individual stock instead of an ETF this week, probably switching from Gildan to Magna International (MG).