The stock markets had a good week. That doesn’t surprise me much, but it does continue to build the case that the time to own bonds is almost past, with the environment appearing poised to favour stocks. Bonds have a slight edge in terms of momentum, but that looks likely to change soon. If I recall correctly, the market average fell below its 200 day moving average around 12,800. Interestingly, the market is now approaching 12,800 and looks set to keep on going. If I owned a portfolio balanced between stocks and bonds, and if I couldn’t handle much fluctuation, I would continue to favour bonds. Having said that, I would be prepared to make a change in the next couple weeks.

Stocks are up 2.7% over the past week, up 2.7% over the last month, up 10.8% over three months and up 3.1% over six months. (You can tell where the tough period was.) They are still down 9.9% over a year ago and down 1% over five years. It’s hard to believe that September 2008 was almost 3.5 years ago.

Looking at my asset rotation model, emerging markets (XEM) remain in favour, and that’s what I continue to own this week. Small caps have done relatively well over the last two months, but with less momentum than emerging markets. There is some chance that I’ll need to be prepared to make a trade in the near future.

Looking at the economic indicators, specifically interest rates and the yield curve, the probability of a bear market remains moderate. Inflation expectations hover near 2%, the yield curve is positive and real interest rates remain positive. Yields are historically low, implying a lot of nervousness among investors. I think most investors remain acutely aware that risks are very real and surprises could be positive or negative. At the same time, the stock market is not overvalued, and investors should be insulated from routine bumps in the figurative road.

My market outlook will be late next week.

Market Outlook February 27, 2011

Leave a Reply

Your email address will not be published. Required fields are marked *