Happy Halloween! Nothing scary here today. A week or so ago felt like the bottom of the market. Interest rates have risen, back to levels last seen in July. In fact, stocks have also returned to the level they were at in July. The market trend seems to have reversed from downward to upward.

The reversal can clearly be seen in the momentum calculations. Momentum for bonds turned negative (just barely), where they have had positive momentum since late May, just after the stock market first turned down. All other asset classes: large cap and small cap stocks, emerging market stocks and real estate have turned positive. Gold (IGT) continues to produce the best momentum, but emerging markets are close behind. I will continue to own gold for the coming week.

According to my calculated estimate of stock market fair value, the stock market is right in the middle of fair value. Earnings reports are not universally positive, but corporate earnings are supportive of higher stock market values than what we experienced through all of October. During the recent correction, the market appeared to be undervalued, and during the bull market before that, it appeared to be overvalued. It will be interesting to see if it returns to “overvalued”, providing an opportunity for profit. Typically, November to May is a profitable period in equity markets.

Market Outlook October 31, 2011

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