The market this week looks as stable ever. The volatility index (VIX) is down to 17.10, and stocks continue to advance smoothly. Stocks have been positive and bond yields are falling. The government bond auctions in Italy and Spain are reassuring. In those cases, it appears that there was public interest exceeding the supply, which pushed down yields. That shows a certain level of confidence in the economies. It’s too early to say how that will translate into corporate profits, but it bodes well, especially in Europe. If those countries place less strain or less demand on the European central bank’s bailout fund, it will leave more resources to support other economies.

Greece continues to be in the news, but there’s a possibility that investors are becoming less nervous. As confidence returns, the stock market will continue to rise. It still appears to be undervalued, relative to corporate earnings and dividend yields. The stocks that I own continue to do well, but they don’t react proportionally to the market. Because they are smaller companies, they react more than others to supply and demand (investors like me buying and selling), and also to their own news and business outlook.

Fortunately, most of them seem to be doing well lately. I am concerned about the dividend policies, especially with Data Group that recently converted to an income trust. I want to ensure that the income I depend on continues to come in. At the same time, I understand that the company needs to be conservative with the cash they pay out, and keep some cash reserves for operational needs. It’s a balancing act on the part of the board, one that I don’t envy.

For now, stocks seem to be caught in a mire, moving only slowly, leaving bonds with better momentum. The momentum appears to be swinging back the other way, but it hasn’t crossed over in favour of stocks (in general) yet. Having said that, my guess last week that emerging markets (XEM) are picking up momentum was correct. Although gold had slightly better momentum last week, it has been surpassed by emerging markets, and that’s where I will keep my assets this week.

Market Outlook February 3, 2012

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