Stocks continue to be in favour. At least, it appears that’s where the smart money (fast money?) is going. The momentum of stocks is at a high point, when compared with bonds. Any portfolio that tries to strike a balance between stocks and bonds should now be favouring equities. Why? Since the signal first came on August 20, 2012 that stocks had better momentum than bonds, the market has risen 7.8%. That’s a timeframe of less than six months. It hasn’t been all smooth sailing, but the stock market appears to be bouyant and wants to rise.

Inflation and interest rates paint a relatively defensive picture of the economy. And the TSX appears more than ever to be overvalued. At the same time, volatility is low, so looking into the rearview mirror (past corporate earnings and past inflation) doesn’t seem to be dampening the optimism of traders. There are a number of assets that are all in favour in the asset rotation model. US small caps (IWM) is in first place, closely followed by European stocks (XIN) and Hong Kong stocks (EWH). I will continue to own XIN in my CDN$ accounts.

Market Outlook January 28, 2013

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