Doug Kass is out with a new article highlighting 10 reasons why equities will rally. He’s a little late to the party compared to our friend “Walter Kurtz” who absolutely nailed the recent move with his “9 Reasons Equities Will Rally” back on December 16. Nonetheless, Kass gives the bulls some good bullet points to chew on and the bears to rip apart (read the full piece here):
1. Poorly positioned market participants: Forget put/call ratios, Investors Intelligence and AAII readings — investors (of all shapes and sizes) are now negative and could be caught offside. Watch not what they say; watch what they do. And the dominant investors (retail and institutional/hedge funds) are underinvested and/or skewed disproportionately in a “flight to safety” into fixed income over equities.
2. Technical breakout: We closed trading on Mondayright at resistance in the major indices. Given the sharp rise in futures overnight (+12 handles), we will easily pierce through resistance at the open and break out of the recent trading range. This action will encourage technically based chasers of market momentum.
3. Big rotation: The rotation from high-octane, high-beta leadership (Priceline (PCLN),Google (GOOG), Baidu (BIDU), etc.) has investors poorly positioned. Google’s sudden weakness, in particular, has scared a number of hedgehoggers I know into materially raising cash in recent days.
4. Mispaced preoccupation with Europe: The European situation has improved. Timid policy response is moving toward “shock and awe” — yet investors are still scared to wake up every morning to rising sovereign bond yields, and that fear is keeping them sidelined.
5. Recent earnings cuts discounted: Yesterday we heard on eight separate occasions onCNBC that earnings cuts are at a near-record level. But we heard it principally from those who failed to see a more worrisome economic and stock market climate (contraction in valuations) last year. Enough said.
6. Likely regime change in the U.S.: Though the odds of a Republican presidency have improved, most investors are ignoring this “market friendly” development that could occur within the next 12 months.
7. Better economic data: Consistently ignored have been improving domestic economic releases (PMI, consumer confidence, housing, automobile industry sales and jobs).
8. Contained geopolitical risks.
9. Market-friendly rates: Low interest rates around the world in 2012-13 mean that any model based on interest rates results in a very inexpensive market valuation.
10. Lower volatility: Crazy market swings scared off and alienated investors over the past year. Shouldn’t the recent collapse in volatility help bring back investor confidence?
Source: The Street.com
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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