The stock market made no real progress last week. As such, bonds continue to present better momentum. It’s strange, though, because bonds’ momentum is barely positive. They only appear more attractive because stocks have produced a negative return over 50 days and 200 days.

The market appears to be somewhat overpriced. It seems to be pricing in earnings growth of approximately 20% over the coming twelve months. From the present vantage point, that doesn’t look very realistic. The economy is certainly not overheating, and it never really fully recovered after the crash of 2008. For that reason, another crash doesn’t seem very likely. We’ve gotten through the traditionally worst time of the year (September and October), but now traders are likely looking to reduce their tax bills by engaging in tax loss selling. That would weaken the market, especially after a year like this one has been.

My asset rotation model now favours Chinese stocks (FXI) over Hong Kong stocks (EWH), but only by a small margin. Both are well positioned, and I’m not going to incur the extra expense of making a change. Within CDN$ ETFs, European stocks (XIN) and emerging market stocks (XEM) are most attractive (in that order).

 

Market Outlook December 10, 2012

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