I guess we all really needed the break afforded by the Labour Day long weekend. After the holiday Monday, the markets did really well. Stocks rose 2.8% while bonds dropped 0.5%. Earlier, I indicated that it was time to move back to stocks. I also suggested that a portfolio balanced between stocks and bonds should no longer be overweight bonds, but should instead rebalance to policy weights. Investors who shifted from bonds to stocks benefitted over the past week. The market performance was so positive that I feel it strongly reinforced the buy signal for the stock market. Despite the fact that we’re not clear of September and October, the stock market clearly has far better momentum and appears to offer the best potential return.

For anyone following an asset rotation strategy, the advantage remains with US Small Caps (IWM). The S&P 500 (SPY) holds a close second place. Real estate is no longer in favour, so I will be selling it in favour of the TSX 60 (XIU). Strangely, gold has roughly equal momentum with the TSX 60, so I’ll keep an eye on that.

According to the news, the sudden jump in the market is related to renewed optimism that Europe won’t founder. The European leadership has communicated a renewed commitment to finding a solution to their economic woes. That doesn’t relate directly to the current profitability of Canadian corporations. The stock market value has risen, but profit reports haven’t changed, with the result that the market now appears slightly more overvalued than it did the last week or two. The next round of earnings reports will bear close watching.

Market Outlook September 10, 2012

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