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Crude’s remarkable rebound this year has put the Toronto Stock Exchange on the cusp of hitting 14,000. The composite index closed yesterday at its highest level in six months. It’s a rally that’s been fuelled in no small part by oil’s 70 percent surge since its February low. And now Canada’s benchmark stock exchange is sitting on the brink of a threshold it hasn’t seen since last August.

Here's a scenario that would have seemed almost laughable last winter: Canadian stocks would become among the strongest in the developed world, led by runaway gains in materials and energy sectors.

And yet, the S&P/TSX composite has rallied by 13 per cent year to date – 24 per cent from its January trough – with leadership coming from those resource sectors that appeared so vulnerable at the start of the year.

The problem for investors now is that the rally in Canadian stocks has re-inflated valuations to levels requiring scrutiny.

"This is one expensive market, not next to bonds, perhaps, but straight up against its historical valuation metrics," David Rosenberg, chief economist with Gluskin Sheff + Associates Inc., said in a note.

A pause in domestic stock momentum is certainly possible, Mr. Rosenberg said. But, he said he still sees value in pockets of the Canadian equity space.

The revival of the Canadian stock market has closely tracked progress in the global energy market over the last several months.

West Texas Intermediate has bounced back from a 13-year low at about $26 (U.S.) per barrel in January to about $48 currently.

Over that time, energy stocks within the main Canadian index have rallied by 43 per cent. The commodity-driven rally has lifted materials stocks by 72 per cent over that same time.

The composite now trades at an average forward price-to-earnings ratio of 20 times, which is five points higher than the historical average and more than two standard deviations from the norm, Mr. Rosenberg said.

"The fundamentals are solid here, but valuations are looking just a little stretched."

The bullish case for Canadian stocks relies on the oil market continuing to heal from a colossal global over-supply, Mr. Rosenberg said.

"We are of the view that the thesis of higher energy prices next year will play out," he said, forecasting a range for crude of $50 to $60 per barrel.

Select names in the energy sector remain attractive as a result of that outlook, he said.

The same goes for bank stocks, which have seen a valuation discount largely close as fears for oil-related credit losses subside.

Other sectors, meanwhile, merely need to "maintain the even keel they have possessed for the better part of the past six years," Mr. Rosenberg said.

His preferred sectors also include industrials, and consumer staples, which "have not kept pace with some of the other safety trades," he said.

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