Market Outlook August 18, 2014

Stocks rose a little over the past week, while bonds stayed flat. That improves my confidence in stocks somewhat. Interest rates are low and inflation expectations aren’t too high, so there’s very little chance that bonds will suddenly earn or lose much money. Stocks, on the other hand, may do quite well, but with the proviso that some will do much better than others.

Chinese stocks (FXI) continue to lead the way. Other stocks have quite limited momentum, which is part of why I think that positive performance will be concentrated in a relatively small number of stocks, not generalized.

Market Outlook August 11, 2014

I’m surprised to see that interest rates have fallen again over the past week. I say that because they are already very low and, although they haven’t fallen far, that’s causing bond prices to rise. Bonds are a guaranteed investment, but at this rate, you’re guaranteed to earn just 2.6% per year for 10 years (and get your money back), or 0.6% over inflation (looking at real-return bonds, if the inflation expectation is realistic). I guess investors are nervous and want to play it safe.

Stocks had a negative week, the second in a row. Their momentum advantage over bonds is falling, although it’s still there. It’s also a way of saying that stocks appear (over the very short-term past) to have plateaued and stopped rising. I wouldn’t claim that it’s a new trend, but it causes me to watch closely.

Chinese stocks (FXI) continue to lead the momentum, although they may have also stopped rising, and their continued momentum could be a result of their recent spike. Emerging markets (XEM) and Canadian large caps (XIU) still look relatively attractive.

Market Outlook August 4, 2014

One thing about writing a market outlook every week, the time just seems to slip by. And when I watch the market every single week, the movements seem so small that it’s difficult to believe that these small gains and losses add up to large, long-term, compound returns. No wonder watching the market daily, hourly or minute-to-minute can be so distracting.

Bonds gained slightly this week, for the fourth week in a row. Interest rates are really low. Real return bonds are only paying 0.61% (plus inflation). Stocks fell in value over the past week, just a little more than they had gained the last week. It’s one step forward, one step back. Looking back farther, it’s more like two steps forward, one step back, because stocks continue to make progress, although volatility seems to be slightly more pronounced.

Actually, since I made a statement about volatility, I though I should back it up with fact. The VIX is at 17.03, which isn’t particularly high, unless it’s compared with its low for the year: 10.32 on July 3. Volatility was low during the months of June and July, and it seemed that everyone just put their investments on autopilot. Now, volatility has risen comparable with early February (10% correction), mid-March (2% correction) and mid-April (4% correction).

Having said all that, stocks are still poised to outpace bonds, although that relationship is weakening. Amongst asset classes, Chinese stocks (FXI) are still leading, but the absolute value of momentum has dropped for each ETF that I track.

Looking at Canadian large caps, gold producers continue to present the most promising momentum (I don’t own any from the TSX60), but I was surprised to see food producers join them: SAP, L and WN (none of which I own).

Market Outlook July 28, 2014

Interest rates have dropped, which should be supportive of economic growth and improved corporate profitability. I find it surprising that, despite the boost that lower interest rates normally give to bond values, stocks continue to have much better momentum. Whereas summer is usually a dead time for stocks, the last month has been pretty good (+2.33%).

Presently, Chinese stocks (FXI) have huge momentum, pulling up emerging market stocks (XEM), although Canadian large caps (XIU) are still doing reasonably well. Gold producers continue to look really attractive on the TSX.

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.