I am getting seriously mixed messages from the stock market. The momentum of stocks is at a new high relative to bonds. Stocks are much more in favour, money seems to be pouring in and prices are rising. That’s good news for stock investors and it implies that a balanced portfolio should be overweight stocks at the moment. On the other hand, the stock market isn’t cheap. It appears overvalued, even if it’s not much worse than over the past few weeks. What seems to be the case is that the short-term outlook is constructive on stocks (good momentum), while the long-term outlook is less rosy (potential growth from the current level). The outlook actually depends on your timeframe.

Volatility has recently jumped up. That tends to make traders nervous, but it’s a sort of self-fulfilling prophecy because it (indirectly) measures nervousness across the market. On a separate note, inflation is quite low and interest rates are low. This is supportive of the economic growth, but the fact that the economy needs this type of support may be worrying.

I continue to follow my asset rotation model. There hasn’t been much movement, just continued growth from European stocks (XIN). This ETF has done really well for me, which is actually a surprise. Reading headlines, I would have thought Europe was a (financial) mess. Nevertheless, demand for European stocks is pushing up the price, and I won’t argue with performance. US small caps (IWM) are a close second.

Market Outlook March 4, 2013

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