I’m glad to see less volatility in the markets, but it does make writing a market outlook rather boring. The market rose about 0.5% over the last week, but that was really between the Friday (10th) close and the Monday (13th) open. Over the course of the week, the market dropped over 1% and recovered to end the week about where it began. I’m unsure how broad-based the movement was, since my stocks rose (with some volatility) over the course of the week.

Stocks continue to lag bonds in momentum, but a lot of the performance difference is between 50 days and 200 days ago. Over the last 50 days, stocks are up 3.24%, while bonds are up only 0.71%. Over the last 200 days, however, stocks have lost 8.52%, whereas bonds have risen 7.89%. No contest, really, but investors may be waiting for those old returns to “fall off” the calculation. To be fair, stocks aren’t exactly rising steadily, but conditions are looking more and more favourable for investing in the stock market. Concerning asset classes, the emerging markets (XEM) continue to lead in momentum, and that’s what I continue to own.

I’m seriously considering adding specific markets to my asset rotation model. Emerging markets constitute an area that provides some diversity compared to the Canadian stock market, but my model ignores the US, as well as ignoring the differences between Hong Kong, Brazil, Russia, Eastern Europe, etc. I’ll have to see what markets I could easily buy into. Bringing it back to Canada, however, the market appears a little less undervalued compared to last week. The TSX appears that it should be valued somewhere between 13,000 and 13,500. I guess there are lingering concerns about risk, probably especially in Europe’s marginal countries.

Market Outlook February 20, 2011

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