The stock market movement wasn’t anything to get excited about last week, although it was better than the weather here in Calgary. It was like one step forward, followed by one step back. Still, it did make some upward progress, and outpaced bonds where interest rates are rising (and prices are falling). There’s really very little to indicate that the market is poised for anything exciting over the coming few weeks.
Stocks continue to present better momentum compared to bonds, so a balanced portfolio would still do well to overweight equities. Looking more broadly at a variety of asset classes and markets, European stocks (XIN) continue to outpace the others (despite weakness last week). US stocks (SPY and IWM) both have even better momentum, but since they also fell over the past week, they didn’t tip the model in their favour.
When the market spends a long time going nowhere, as has been the case for the past four months, it becomes a stock picker’s game. I saw an article that referred to some research (I wish I could find it again) that showed that the majority of stock market returns come from a very small number of stocks. That is to say, most stocks go nowhere (slightly up or slightly down), while only a small number go way up (or way down). That’s why it’s so difficult to beat the market average, since the average is skewed by a very small number of stocks, and it’s easy to miss them if you don’t own everything. So when I say that it’s a stock picker’s game, I mean that it would be easy to outperform if you could tell in advance which stocks will lead. My momentum model seems to do that for individual stocks. I’ll review that on Wednesday.