Bonds outperformed stocks over the past week (0.5% vs. 0%), but that doesn’t change the outlook. I continue to expect stocks to outperform bonds for the present. The advantage that stocks have in relative momentum remains significant. The corollary, however, is that my model doesn’t turn on a dime, so it would take a couple weeks before I received a signal to change my outlook. Having said that, the stock market doesn’t usually turn on a dime, and even a sudden drop usually comes after a couple weeks of flat returns.

Comparing various markets, Canadian small caps (XCS) maintain the top momentum, even though they lost money last week. In second place, we find US small caps (IWM) and Canadian large caps (XIU). As I pointed out last week, XIU has been quite stable and has produced a nice return over the past year or two. I realize that my model gives preference to volatility over stable, consistent returns. Sometimes that works in my favour, but that’s the reason I missed the returns in XIU, as well as the doubling in price of CP Rail (CP) over the past year and a half. I watched it increase from $95 to $130, but it was rarely right at the top of my model, and I avoided it because I feared the volatility. If anyone bought shares in CP a couple years ago and just held them, I bet they feel like a genius now.

I wrote last week about buying gold producers, and I feel like a genius right now. I still don’t know why, but the share prices all jumped on Friday. It would have been nice to own them, but MG did okay for me. I plan to take my gains, however, and trade into CNQ.

Market Outlook June 30, 2014

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