Market Outlook May 30, 2011

I’ve been writing about asset rotation lately, and the backtest seems to indicate that it works. So instead of comparing only stocks, bonds and cash, which would have been helpful to avoid market crashes, I’ll now look at the asset class that is most likely to perform well between large-cap stocks, small-cap stocks, emerging market stocks, bonds, cash, real estate (stocks) and gold.

I haven’t included commodities because I didn’t find a suitable ETF, but it’s been interesting that over the last few weeks, the markets have favoured gold and real estate. These two asset classes have characteristics in common, such as being a good hedge against inflation, which is also the case for other commodities.

This week, gold (IGT) appears to have the best momentum, although real estate is not far behind. This doesn’t imply a bear market and interest rates have fallen, lessening the likelihood of a bear market. And as positive earnings results are reported (except by the companies I own), the fair value of the market is moving slightly higher.