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A man walks past an old Toronto Stock Exchange (TSX) sign in Toronto, June 23, 2014

Mark Blinc/Reuter

Not even a record high can shake Canadian stocks of their 'Eeyore' complex.

The S&P/TSX Composite Index climbed to 15,963.60 at 12:13 p.m. on Friday, surpassing the intraday record hit on Feb. 21 after outpacing its global peers since Sept. 8. Financials have accounted for more than half of the advance, with industrials, consumer discretionary and energy also contributing.

But the grind higher has so been so long and tortuous, investors are loathe to put much faith in the rally.

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"We're looking for opportunities to take money off the table," Sadiq Adatia, who oversees about $18.5-billion as chief investment officer at Sun Life Global Investments, said in a phone interview before the record. "Just look at all the risks that are there. Whether it's Nafta, real estate, consumer debt -- all those things are negatives to Canada's economy."

After wallowing in the red for a good chunk of the year, the S&P/TSX has gained 6.5 per cent since its September low. The strength is the result of improving oil prices, rising interest rates which have fattened banks' lending margins and, perhaps most importantly, a market that had simply become too cheap to ignore.

The S&P/TSX's gains since Sept. 8 outperform a 4.7-per-cent increase in the S&P 500 Index and a 3.5-per-cent gain in the MSCI World Index. This is a reversal from the first eight months of the year, when the Canadian benchmark fell 0.5 per cent compared with a 10-per-cent gain for the S&P 500 and a 12 percent increase for the MSCI World Index.

Even with its recent gains, the Canadian index is way behind its U.S. counterparts, which have hit a series of record highs this year. The year-to-date gain for the S&P/TSX is just 4.4 per cent versus 15 per cent for the S&P 500. Canada still lags most developed markets, ahead of only Israel and Australia, according to data compiled by Bloomberg.

Canada's stock underperformance came, ironically, as its economy outpaced its Group of Seven peers with 4.5-per-cent growth in the second quarter.

"This 'Eeyore' complex has been the defining theme for Canadian equities throughout 2017 and has resulted in Canada being one of the worst-performing equity markets year to date," Brian Belski, chief investment strategist at BMO Capital Markets, said in a recent note, referring to the morose Winnie-the-Pooh character who sees doom and gloom at every turn.

Overweight Financials

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Mr. Belski, who predicted the rebound in a Sept. 14 note that argued a "BIG bounce is coming once calmer heads prevail," is optimistic that the rally has legs, pointing to stronger-than-expected earnings growth and improving fundamentals. Belski's year-end target for the S&P/TSX is 16,000, a gain of just 0.3 per cent from here, although he says that may be conservative.

"I think people are genuinely negative Canadian stocks and it's a classic game of catch-up," he said in an interview, adding that investors need to ditch their obsession with commodities. "All they really care about is gold and oil, gold and oil, and if those two things are going up we feel better. We've got great companies in Canada but we consider ourselves a failure unless gold and oil are going up."

Mr. Belski recommends an overweight position in Canadian financials, industrials and materials. He likes the big banks, insurers, railways, and individual stocks including West Fraser Timber Co., Waste Connections Inc., Canadian Tire Corp. , Dollarama Inc. and Loblaw Cos.

Mr. Belski's view is supported by technical analysis. The $1.7-billion Horizon S&P/TSX 60 Index ETF recently formed a golden cross, meaning the short-term moving average has broken above the long-term moving average -- a buy signal.

Others are more reticent. Javed Mirza, technical analyst at Canaccord Genuity Corp., said the S&P/TSX seems overbought and predicted a near-term pause or pullback before the rally resumes.

TD Asset Management, meanwhile, is underweight Canadian equities.

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"Elevated household debt, modest oil prices and low productivity are likely to be headwinds, and we expect growth to slow," analysts led by Bruce Cooper, CEO and chief investment officer of TD Asset Management, said in a note. "Decelerating economic growth, low inflation and soft commodity prices may weigh on the earnings of Canadian companies."

Sun Life's Adatia is also worried about tapped-out consumers, a deflating housing market and the risk that NAFTA renegotiations could fall apart. He said a stock pullback is "not a question of if, it's a question of when."

"We have a lot of defensive positioning in Canada for that pullback," he said. "I do not think there's much more upside from here."

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