Market Outlook: January 17, 2011

The Bank of Canada’s prime lending rate was held unchanged. Inflation also remained unchanged at 2%. However, the yield curve has steepened a little, with short rates falling and long rates rising. This causes a bear market to appear even less likely than since mid-November.

Stocks and bonds both fell this week. While stocks continue to demonstrate far better momentum than bonds, they seem to have moved sideways over the last three weeks. Momentum for stocks has remained fairly consistent, and bonds continue to appear unattractive by comparison.

The stock market as a whole is trading near the upper boundary of what seems like fair value. Having said that, earnings season has begun with many companies beating expectations. It will be interesting to see if that trend continues and what proportion of companies are able to beat expectations. I expect stocks to encounter some resistance (or skepticism) as they approach the level of 14,000 where they spent a lot of time in 2007 and 2008. There seems to be a good chance, given the rapid increase in prices lately, that the market could either correct, or spend a few weeks, if not a couple months, moving sideways.