Market Outlook July 21, 2014

Inflation is higher at 2.4% (top line). Interest rates, however, have fallen, implying that investors expect inflation is currently lower than the backward-looking reported number. Both, however, are indicators of economic strength, which is generally good for corporate profits.

Stocks and bonds both rose over the past week, which is not usual. Stocks were more profitable, so they gained momentum relative to bonds. Amongst asset classes, XCS is no longer very positive, and Brazil stocks (EWZ) have taken the lead. Within Canada, large caps (XIU) shows the greatest momentum (and is not far behind).

Looking across a greater number of stocks, I still see more negative momentum than I’m used to, but the number of positive stocks isn’t so small as to make me worry.

As a reminder, I’m unlikely to be able to post next week because I won’t have access to internet. Such is life.

Market Outlook July 14, 2014

The stock market is showing the early signs of weakness. Because the stock market growth has been so strong, it will take some time before bonds present better momentum and thus appear more attractive.

Over the past week, interest rates have fallen, meaning that bond values have risen. Both of these are resistant to growth in stock prices. The TSX60 fell 0.23% over the past week, while the broader TSX fell more than 0.5%.

Last week, I failed to notice that the TSX had broken its all-time high, and that the stock market value had reached new heights. That’s usually a time that traders get nervous, which often causes prices to pause and even drop for a period. Looking at the TSX60 and the broader market, it appears that only gold producers are increasing in price. This means that the movement of the average likely understates the fall in price, since a few stocks are bringing the average up.

For the present, I remain of the opinion that tactical allocation should prefer stocks to bonds, but it probably makes sense to even weight them, not overweighting either asset class.

Between the various asset classes, small cap stocks (XCS) continue to be in favour, but only because all asset classes are weakening together.

As an aside, I may not be able to post during the next two weeks.

Market Outlook July 7, 2014

Over the past week, interest rates rose modestly, which translates into a loss of value for bonds (-0.3%). By comparison, the value of the stock market rose (0.9%) for the fifth straight week. It stands to reason, then, that the momentum of stocks makes them much more attractive than either bonds or cash. Stocks actually look better positioned now than they have since April of this year. Some years, the summer vacation translates into a long, boring sideways movement for the stock market, but that doesn’t appear to be the case this year, at least not yet.

Comparing the various asset classes that I track, small cap stocks (XCS) continue to come out ahead. I like seeing this type of steadiness in the comparison, because it means that volatility is relatively low, confidence is relatively stable and I’m not going to pay a bundle in transaction fees by trading (which tends to be useless when it’s too frequent).

As I pointed out last week, owning Canadian large caps (XIU) has been just as good recently and has been more beneficial than asset rotation over the past year. I assume that, presently, that’s because of the Canadian market’s large exposure to gold producers and mining stocks, which seem to be in favour currently.

Market Outlook June 30, 2014

Bonds outperformed stocks over the past week (0.5% vs. 0%), but that doesn’t change the outlook. I continue to expect stocks to outperform bonds for the present. The advantage that stocks have in relative momentum remains significant. The corollary, however, is that my model doesn’t turn on a dime, so it would take a couple weeks before I received a signal to change my outlook. Having said that, the stock market doesn’t usually turn on a dime, and even a sudden drop usually comes after a couple weeks of flat returns.

Comparing various markets, Canadian small caps (XCS) maintain the top momentum, even though they lost money last week. In second place, we find US small caps (IWM) and Canadian large caps (XIU). As I pointed out last week, XIU has been quite stable and has produced a nice return over the past year or two. I realize that my model gives preference to volatility over stable, consistent returns. Sometimes that works in my favour, but that’s the reason I missed the returns in XIU, as well as the doubling in price of CP Rail (CP) over the past year and a half. I watched it increase from $95 to $130, but it was rarely right at the top of my model, and I avoided it because I feared the volatility. If anyone bought shares in CP a couple years ago and just held them, I bet they feel like a genius now.

I wrote last week about buying gold producers, and I feel like a genius right now. I still don’t know why, but the share prices all jumped on Friday. It would have been nice to own them, but MG did okay for me. I plan to take my gains, however, and trade into CNQ.

Investment Idea: gold producers

I’m not exactly sure what’s going on. That’s because I don’t read news headlines.

Let me back up. The journalists who write news articles and headlines don’t know what causes prices to change in the financial markets. Even investment experts rarely know without the benefit of hindsight (and even then!) what causes shifts in markets. So I ignore the news. I don’t really care WHY prices are moving, I just want to take advantage of opportunities.

What I’m seeing is that the price of gold isn’t moving much. Over the past 14 months, it has remained around $13.25, give or take $0.75. I do not believe that the price of gold is currently trending up or down. Having said that, the stock price of gold producers is trending upward.

Currently, among the TSX60, three of the top five stocks (based on momentum) are gold producers: IAMGOLD (IMG), Agnico Eagle (AEM) and Eldorado Gold (ELD). I don’t know whether the market is predicting a downturn by moving to the relative safety of gold (by proxy of the producers), whether margins on production of improved or whether it’s what all the cool investors are doing. I don’t really care why, I just see that there appears to be opportunity in investing in gold producers.

Full disclosure: I’m not buying. I’d rather see both the price of the commodity and the stock price of the producers moving up.

Market Outlook June 23, 2014

Inflation has risen. Topline inflation increased from 2.0% to 2.3% and core inflation rose from 1.4% to 1.7%. While rising inflation erodes purchasing power and is bad news for retirees living on a fixed income and for bond investors, it signals good economic news. Inflation usually rises with the speed of circulation of money, implying that more people are buying and selling. Since the market crash in 2008, the spectre of deflation (or stagflation) has been a continual worry, and inflation continually came in well below the Bank of Canada’s target of 2%. At present, the economy appears to be strong enough to produce an inflation reading near, and no longer below, the target.

Increasing inflation generally coincides with increasing interest rates, which are bad news for bonds. Sure enough, bond values fell over the prior week, while stock values rose. As a result, stocks remain in greater favour and should be overweight.

Canadian small cap stocks (XCS) continue to lead amongst the indices that I compare, with Brazil stocks (EWZ) still very close. Also posting good momentum are Chinese stocks (FXI), Canadian large caps (XIU), US small caps (IWM) and US large caps (SPY).

I still find that individual stocks post better momentum (and greater volatility) than index-based ETFs, so I have owned MG for the past couple weeks. It has done well for me, but this week I’m going to trade it for something with more momentum: BB, ERF or SU.

Market Outlook June 16, 2014

Over the past week, interest rates and bond values barely moved. Stock prices, on the other hand, rose appreciably. It will be no surprise then that stocks are more in favour than ever. They have enough momentum that the short-term outlook is very positive. All those who ignored the “sell in May” dictum and remained invested in stocks will likely be rewarded.

Among the various market, Canadian small caps (XCS) have the greatest momentum, with Brazil stocks (HWZ) are practically tied. I say that, but looking back, the last four weeks of momentum data have led to losses. Following my momentum model would have led to a 4.8% loss over four weeks, compared to a 3.4% gain for just owning the TSX60 (XIU). Looking back further, the momentum model lost 4.3% over 12 months, versus a gain of 23% for XIU. This underscores the increased volatility of the momentum method. The TSX60 has beaten my momentum method four times (comparing rolling 12-month periods) over the past 13 years, but momentum avoided some of the worst losses, and had some greater gains, totalling an advantage of over 300%.

Market Outlook June 9, 2014

So far, so good. The stock market continues to appreciate and is nearing its all-time high. Confidence appears to be fairly strong, although volatility appears to be increasing somewhat, which corresponds to nervousness. The momentum of the stock market relative to bonds bodes well, which indicates that stocks should continue to outperform over the near term.

Inflation has increased, although the measurement is backward-looking and is already two months old. With top-line inflation at 2%, it is nowhere near worrying, but rather reflects strength in the economy. Anecdotally, I’m hearing about a strong housing market (here in Calgary), which is also a symptom of a strong economy (combined with low interest rates).

Looking at the various markets that I compare to each other each week, Emerging Markets (XEM) continue to be in favour, alternating with Hong Kong stocks (EWH). If one were following this investment method, they would choose the index fund that better matches their currency needs: EWH in USD or XEM in CAD.

Personally, however, I continue to buy individual stocks that present even stronger momentum than these index funds. Right now, ERF.to is in favour and is serving me well.

Market Outlook May 26, 2014

I was briefly looking back at the market level over the past 13 years. I was struck by how little movement there has been over the recent past. One step forward, one step back, and the stock market has made very little progress. In 2007, the TSX flirted with levels over 14,000. In 2008, the market reached 15,000 (before falling to just over 8,000). It took until early 2011 before the market broke 14,000 again, but it didn’t last. It tumbled to just over 11,000 before slowly climbing back to 14,000 earlier this year. Over the past seven years, investors (and speculators and savers and gamblers and pension funds) have (on average) experienced a lot of fluctuation and made essentially no progress.

That assumes buy and hold with no fees. Any costs, such as fees and taxes, and any trading losses would produce an even worse result. That makes me feel a lot better about not really increasing the value of my investment accounts since I quit working in 2011. But my momentum approach should outperform buy-and-hold, because there’s always something that’s working, it’s just a matter of getting in front of the herd, and keeping the transaction costs down.

This week, stocks performed well. Interest rates rose slightly, from a very low level, which caused a negative return for bonds. It’s not time to sell stocks, since they continue to perform well, and have more promise over the near term.

Between the various markets (which is more accurate than “asset classes”, even if I refer to “asset rotation”), Emerging Markets (XEM) has slightly better momentum than Brazilian stocks (EWZ), followed by Hong Kong stocks (EWH) and Canadian large caps (XIU). I wonder how much influence the exchange rate has on that relationship.

Market Outlook May 20, 2014

Over the past week, bonds performed better than stocks. That reduces the preference for stocks, which was quite large, but it doesn’t erase it. Stocks still appear positioned to outperform bonds over the coming weeks. Of the markets that I track, Brazilian stocks (EWZ) still has a clear advantage over the others, but Emerging Markets (XEM), Canadian Large Caps (XIU) and Real Estate (XRE) are all in a distant second. The market seems to be slowing, which brings to mind the dictum “Sell in May and go away.” (This does not constitute advice.)

Interest rates are somewhat lower than a couple weeks ago, including mortgage rates. This implies that the economy is strengthening. We’ve just gone through earnings season, so the market appears to be sending the same message, with slightly higher prices compared to a couple months ago.