Market Outlook October 27, 2014

I’m satisfied that the market correction is over. From the top to bottom, the TSX composite fell by almost 11%. It is very normal to experience a correction of this magnitude every year or two. (And very normal for it to arrive in October, for whatever reason.) Stocks have regained their momentum, although not universally across market segments. Real estate seems to have the advantage at present, which is a defensive stance.

The positive week that stocks experienced, gaining 2.56%, doesn’t undo the damage of the correction. That makes it a good time to buy, as everything is (likely) on sale. In a balanced portfolio, stocks should be target-weighted, compared to bonds, for the present.

Real estate stocks (XRE) have the best momentum among asset classes that I track. Only Hong Kong stocks (EWH) and bonds (XBB) also have positive momentum, and they are roughly equal at this point. As a side note, Brazil stocks are in the toilet. How do you say “Sorry, guys” in Portuguese?

Among individual stocks, Gilead (GILD) in the US continues to appear attractive. I sold it for cash during the correction, but that turns out to have been a mistake. I initially bought it at $90.40 (in mid-July), then sold at $102.06 on Oct 17, when it was clear that markets were correcting. I avoided the bottom ($96.16), but I also missed the rebound and it closed at $110.71. Not only did I miss out on 8.5% growth, I also paid a transaction fee to get out, and I’ll pay another to get back in. In this case, buy-and-hold would have served me better.

Market Outlook October 20, 2014

Bond yields fell last week, meaning that bond prices rose (very slightly). As you might expect during a market correction, gold also rose. Stocks, however, were basically flat for the week. That means very little has changed since last week, and bonds continue to enjoy a slight advantage over stocks. I’m not going to go so far as to predict that the correction is behind us. That remains to be seen, but the market has fallen 9% from it’s (weekly close) high, which is a pretty normal correction. Often, each calendar year produces at least one market correction, of 5% – 10% in 1/3 of cases and of 10% – 15% in another 1/4 of cases; 1/10 of the time it’s less severe, and the other 1/3 of the time it’s worse.

Comparing momentum between asset classes, bonds have given up the lead to gold (IGT). Bonds and gold are only slightly positive, and they are the only two asset classes with positive momentum at all (unless you include cash). Both would make suitable, defensive holdings for the coming week.

In my accounts, I sold my momentum holdings for cash last week. I’m not looking to jump back in at this point, and plan to wait for a better opportunity to re-enter the market.

Market Outlook October 13, 2014

Happy Thanksgiving. Canadian exchanges are closed today, but US exchanges remain open.

I’m at the point where I’m selling some of my stocks (that I bought based on momentum) for cash. I don’t know that things are going to get worse, but I don’t know that they’ll get better, either, and I’m willing to sit on the sidelines for a bit. I will continue to hold my dividend-paying stocks.

Stocks had the worst week in quite a while, dropping 3.64%. Bond rose is value (0.55%), although interest rates are little moved. Comparing the momentum between stocks and bonds, the advantage goes to bonds, for the first time in a year and a half (May 2013). This does not bode well. A balanced portfolio should now overweight bonds, and very nervous investors may do well to move out of stocks (although it’s impossible to tell in advance if the transaction costs will be offset by avoiding value loss).

Even if I compare a number of asset classes, bonds still show the most potential. Given how low interest rates are, that’s quite a feat. I’m not optimistic about the next couple weeks for stock investors.

Market Outlook October 6, 2014

The stock market is well and truly in a mini-correction. Over the past three weeks, the stock market has fallen by 5.24%. In mid-September, I was hoping this would be a year where we could look and September and October and say: “See? There’s nothing spooky about these two months in the market. It’s all just superstition.” But it looks now like a reasonable tradition, and I’m not prepared to bet that the correction is ending. The short term outlook is risky.

Stocks and bonds have roughly equal momentum (or lack thereof), which indicates that a balanced portfolio should return to target weightings; it no longer looks profitable to be overweight stocks. In fact, comparing asset class momentum, bonds are the only one to present positive momentum. It’s time for investors to look for safety and take risk off the table.

Very few individual stocks have any positive momentum. This correction is not confined to a single or a couple sectors, but appears to be affecting the majority of stocks. A couple exceptions (disclosure: I own some of these) are Gilead (GILD) and Nike (NKE) in the US and CP (CP) and Valeant (VRX) in Canada.

Market Outlook September 29, 2014

Last week, stocks underwent another correction of -1.6%. At least a minor correction seems typical for this time of year. Over the past two weeks, the stock market has given up 4% of its value. Compared to the 14.5% it had grown since Jan 2014 (until two weeks ago), that doesn’t seem so bad. While stocks fell over the past week, bonds rose, as would be expected. Even so, stocks continue to have a momentum advantage over bonds, albeit a shrinking one. To be blunt, the next four weeks probably won’t be much fun for investors who own stocks.

The outlook for stocks is not rosy. Hong Kong stocks (EWH) have negative momentum, Brazil stocks (EWZ) have massively negative momentum, Chinese stocks (FXI) have barely positive momentum, gold (IGT) has negative momentum, US small caps (IWM) have negative momentum, US large caps (SPY) have a little positive momentum, bonds (XBB) have a little negative momentum, Canadian small caps (XCS) have very negative momentum, Canadian large caps (XIU) have a little negative momentum, emerging market stocks (XEM) have slightly negative momentum, real estate (XRE) has negative momentum and, the big winner, European stocks (XIN) has somewhat positive momentum. In a nutshell: there’s nowhere to hide at the moment. As a comparison to stocks, bonds grew in value by just 3.23% from Jan 2014 until two weeks ago.

A few individual stocks show promise. Right now, CP Rail (CP) is working for me. It’s gained 8% over the six weeks that I’ve owned it, and it appears poised to continue. In the US, Gilead Sciences (GILD) has served me well for the past ten weeks and is really the only US large cap stock (from the S&P 100) that looks promising.

 

Market Outlook September 22, 2014

Interest rates have risen again and inflation has remained constant. But it doesn’t appear that the economy is strengthening; I say that because rates are still so low. The stock market pulled back in a 2.4% correction. It appears that there may be more to come, so this would be a good time to play it safe. It’s rare to see both stocks and bonds drop in a week, since they usually move opposite each other. My indicators don’t exactly suggest going from stocks to bonds for safety, but stocks are looking much riskier at this point. Traders and short-term investors might be well-served by going to cash.

I’m seeing the same thing in my individual holdings. A number of stocks that had good momentum and had gained 10% or 20% over the past couple months, have suddenly dropped back 20% or 30% (ouch!).

Market Outlook September 15, 2014

Interest rates continue to creep up. That’s not helpful for bond values, which fell again over the past week. Stocks barely increased, but that’s still positive. The result is that stocks continue to outpace bonds, and the outlook is very much in favour of better performance by stocks when compared to bonds. That doesn’t mean stocks will necessarily be positive, however.

This week, Canadian large cap stocks (XIU) have the best momentum amongst various asset classes. In the interest of taking responsibility, my advice last week to own Brazilian stocks turned out very badly. Luckily, I didn’t follow my own advice, owning CP instead. It doesn’t have the same diversification, but it produced better returns, which appears likely to continue for the coming week.

American tech stocks look interesting, including Microsoft, HP, Intel, Apple and Google, for anyone who’s watching and is inclined to do a little more research on your own.

Market Outlook September 8, 2014

Oops, I’m a little late in writing this today. Stocks rose slightly last week, which put them far ahead of bonds. Fixed income retreated as interest rates rose. That leaves stocks with better momentum by comparison, but also with relatively good momentum. The summer was a relatively profitable period for stock investors (but it’s over here in Calgary, with our first snow!). September and October don’t look likely to be as problematic as they have sometimes been in the past.

Brazilian stocks still hold the lead in comparative momentum. They are followed by Chinese stocks, Canadian stocks and US large caps. I’m optimistic for the near future.

Market Outlook September 2, 2014

Markets are closed on September 1 for the Labour Day holiday.

Over the past week, both stocks and bonds rose in value. While both have produced positive growth over the past week, month and year, stocks have outperformed bonds by rising more quickly. Stocks continue to present better momentum, and should be overweighted in any balanced investment account.

Brazil stocks (EWZ) have suddenly leaped forward, which gives them the greatest momentum among various markets. I don’t know the reason for the jump, and have no opinion whether or not it will continue (presenting an investment opportunity) or revert (presenting risk). American large caps (SPY) and Canadian large caps (XIU) both continue to have good momentum also.

Tim Hortons (THI) suddenly jumped in value as a takeover bid was made by Burger King. I don’t believe that one-time events truly impact ongoing momentum, so I will not purchase shares. Among Canadian large cap companies, CP continues to lead in momentum.

Market Outlook August 25, 2014

The past week was a healthy one for stocks. Headlines on Friday said the market “dropped”, but it was actually fairly flat. To be honest, so were Monday and Thursday. Tuesday and Wednesday, however, produced such strong gains that the entire week was up 1.5%.

Bond values fell and yields rose. That’s not helpful for bond owners, but an improvement for prospective buyers. Bond yields are so low, that it appears a lot of money is still very nervous. That seems a little strange, since the stock market is making new highs. But if money were to move from bonds to stocks, bond yields would rise even more, which would make bonds a better investment and would be more in line with past averages.

Not surprisingly, stocks continue to show better momentum than bonds. Any balanced portfolio should continue to overweight stocks. This continued strength is out of the ordinary for the summer months, but probably reflects an appreciation of economic growth and corporate profitability and indicates that this year will, overall, be a good one.

Amongst asset classes, Hong Kong stocks (EWH) have surpassed Chinese stocks in momentum. Canadian stocks (XIU) and emerging markets (XEM) in CDN$ are tied just behind.