The past week was slightly negative (relatively flat at -0.48%) for stocks. However, that doesn’t change the fact that momentum continues to move in favour of stocks. The stock market (as a whole) has clearly outperformed bonds for the last three months (and more). I expect that stocks will continue to produce better performance over the next few weeks. After that, it’s too early to tell.

My asset rotation model favours European stocks (XIN), which works well since that’s what I’ve owned for the last couple months. The performance continues to be entirely satisfactory. Further, I’m pleased with the relatively low turnover. As a note, I know of a group that applies a similar methodology to individual stocks. I’ve heard from an investment advisor that they were able to produce 14% growth in 2012, contrasted with 4% for the TSX. I don’t know if I’m lacking expertise or computing power, but I have not yet been able to make it work.

I’ve also heard that my estimate of the stock market being overvalued is off-putting. Allow me to clarify that by my estimate, the stock market is reasonably valued anywhere between 8,400 and 14,073. It’s true that the mid-point is a little below 11,000, which might imply that the market is over-valued. However, the fair market estimate is based on corporate earnings (through the P/E), which are reported for the prior quarter and are thus backward-looking. The market is forward looking, and it will always appear to be somewhat overvalued while it rises. I would be more concerned if the market neared or exceeded the top of the range (14,000 in this case).

Market Outlook February 4, 2013

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