For the first time in over a year, my model indicates that it’s time to own stocks. I’m not going to get carried away, because this measure of momentum can quickly reverse, and also because not all the indicators are pointing up. But for those with a portfolio balanced between stocks and bonds, it now appears to be time to overweight stocks.

The momentum of stocks has outstripped that of bonds. It appears that money has been moving from bonds into stocks over the past couple weeks, and it has built up to the point that more money is likely to follow. I looked back to 2008, where a similar scenario presented itself in April before rapidly reversing by July. During that brief period of momentum in favour of stocks, the market produced a return of 2.39% (and bonds fell 0.4%). I’m not predicting that owners of stocks are in the clear for a long period of time, only that they look promising at the moment.

The market appears overvalued, however. The market price has increased while my fair value estimate has decreased. The market may be as much as 8% overvalued and appears to be discounting earnings growth of 15% over the coming year. This implies that the most recent quarterly earnings have been disappointing.

I personally have owned stocks all throughout the past year. It’s been painful at times, watching stock prices gyrate. Volatility has been much lower recently (VIX under 14) and my model says to continue to own US stocks (SPY). I don’t want to buy an ETF on the NYSE because of the cost of the exchange, so I’ll continue to own XRE, which also posts good momentum. I was surprised to see that European stocks (XIN) also have good momentum for the coming week.

I’ve been waiting for quite a while for the week when I could write that stocks finally have better momentum than bonds. It’s here, and I’m excited. I’m not doing anything about it, but I’m excited. I hope that the market will regain its footing and start climbing again. As much as I like finding bargains, I’d like even more to see my investments grow in value. For now, I’m watching and waiting.

Market Outlook August 20, 2012

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