Given the positive performance of the stock market over the past few weeks, it’s not surprising that the momentum of stocks has continued to gain over bonds. It looks like money continues to flow into stocks. That’s not to say that stocks are fairly valued, but as the demand for stocks increases, the price will likely follow. In support of the rising stock market, volatility has dipped to a new low of 12.40. It seems like this present market increase is relatively stable.

The headlines out of China are supportive, indicating economic strength and growth. My asset rotation model also favours Chinese stocks (FXI), with Hong Kong stocks (EWH) a close second. I also continue to own the third place asset, European stocks (XIN) because the ETF trades in Canadian dollars.

In case I appear optimistic without reserve, let me point out that the fundamentals of the Canadian stock market do not support the present value. While it’s normal for the market to appear overvalued while it rises in value (ahead of corporate earnings), we have yet to see the earnings releases that justify the current valuation. The market appears to be almost 17% overvalued, and is trading at a relatively elevated PE of 18.9.

Market Outlook January 21, 2013

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