It hasn’t been easy to feel excited about investing in stocks lately. Over the past week, stocks fell 0.5%. At the same time, stocks continue to show more momentum than bonds, which also fell over the past week. It is interesting to note that bonds have risen 1.17% over the past month, while stocks are down 0.67%. But that really just reflects the fact that stocks are more volatile. Over a period of three months, stocks have outperformed bonds +5.13% to -0.60%. The relationship of outperformance holds over periods of six months, one year and five years.

Looking at my asset rotation model, I see that US small caps (IWM) are clearly in favour, not too far ahead of Brazil stocks (EWZ), Hong Kong stocks (EWH), and Chinese stocks (FXI). Those are followed, unsurprisingly, by Emerging Markets (XEM, in CDN$). Part of the reason I make this point is that US large caps follow further behind. The momentum in US stocks is not widely generalized. As an example, I have owned Walgreen (WAG) over the past week, and been rewarded for doing so. I will continue to own it over the coming week.

For my Canadian dollar investment accounts, I will continue to own Magna (MG), since it has a better outlook than any of the CDN$ ETFs. I just wish I owned VRX instead. I simply don’t have high enough confidence that VRX will outperform MG to incur the transaction costs to switch.

Market Outlook October 7, 2013

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