Market Outlook September 5, 2011

Everything is up over the last week. Gold is higher, bonds are higher and all the stock indices are higher. The economic news is less pessimistic and the stock markets seem to be stabilizing. The last few weeks, however, have fluctuated between gains and losses, so it will be interesting to see if positive returns can be sustained over next week. In fact, it will be more interesting to see which asset classes continue to post gains, given that gold and bonds usually move inversely to stocks.

Bond rates have not perceptibly moved since last week. The stock market still appears to be fairly valued, although the market level has moved up in comparison to the fair value estimate, which has remained almost unchanged. Volatility appears to be dropping, although it is still elevated. It will need to continue to fall before I can have any confidence that the stock market is returning to steady, positive growth.

Based on momentum, bonds are still preferable over stocks. Having said that, the momentum of stocks is picking up, and in another 2-4 weeks, the market may be more favourable to the point that it will be time to own stocks again. This is less a prediction and more a caution that the time to own stocks is not yet. For the asset rotation portfolio, gold (IGT) is still the place to be, and looks like it will be for a couple weeks at least, given its strong momentum.