Top Forecaster: Market Fundamentals Best in 20 Years

Top forecaster Norman Fosback says “the market’s fundamental position has evolved to the most favorable alignment in 20 years,” and sees big gains for stocks over the next year and the next five years.

Fosback, who served as head of the Institute for Econometric Research for three decades, has a “long and eminent a record”, according to MarketWatch’s Mark Hulbert. Hulbert notes that in the latest Fosback’s Fund Forecaster newsletter, Fosback says his econometric model is calling for the stock market to rise by 19% over the next 12 months, and 89% over the next five years — that’s almost 14% annualized.

Fosback’s model uses several indicators that he has found to have predictive value, Hulbert says, and right now Fosback says the major underlying issues that will drive the U.S. market higher are “domestic corporate profits, valuations of domestic stocks, and Federal Reserve policy.” He says corporate profitability is at an all-time high, but market P/E ratios are back where they were in 1990.

As for the European debt crisis, Fosback doesn’t think it will take down U.S. markets, saying all the talk in the media about Europe is little more than “sleight of hand: Look over there … while the real action is right here.”

 

Hulbert: Prescient Indicator Is Bullish

Mark Hulbert says an indicator with an impeccable track record is now in bullish territory.

The indicator: The High Low Logic Index, created by Norman Fosback in the 1970s, when he was president of the Institute for Econometric Research. “The index represents the lesser of two numbers: New 52-week highs and new 52-week lows with both expressed as a percentage of total issues traded,” Hulbert writes on MarketWatch.com.

Essentially, the index looks for uniformity; that is, times when the highs far outnumber the lows, or times when the lows far outnumber the highs. According to Fosback, Hulbert reports, “it doesn’t matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs.” Conversely, Fosback has said, times when there isn’t high uniformity indicate that “the market is undergoing a period of extreme divergence … Such divergence is not usually conducive to future rising stock prices, [since] a healthy market requires some semblance of internal uniformity.”

Fosback recommended using a 10-week exponential moving average of the High Low Logic Index. Ned Davis Research uses that technique, and it has found that readings below 2.5% are bullish, Hulbert says. “Whenever the 10-week exponential moving average of the High Low Logic Index is below this level, according to the firm, the S&P 500 index has appreciated at a 17.9% annualized rate,” Hulbert says. “Whenever it has been above 4.05%, in contrast, the S&P 500 index has declined at a 12.5% annualized pace.” (Readings between 2.5% and 4.05% are considered neutral).

Currently, the indicator is at 1.7% — solid bullish territory, Hulbert notes. He adds that there have been just four times in the past 25 years in which the Ned Davis version of the index has moved from bearish territory to levels of 1.7% or lower. The four times came right near major market bottoms: late 1987, late 1990, early 2003, and late 2008, he says. That’s not quite the case today, however, since the indicator didn’t rise above 4.05% before its recent decline. But all in all, the indicator is painting a bullish picture, Hulbert says.

 

Top Forecaster: Real GDP Back to Pre-Recession Levels

While few have noticed, the U.S. has now reached pre-recession gross domestic product levels, says one top strategist who is bullish heading into 2011.

In a recent MarketWatch column, Mark Hulbert says Norman Fosback, editor of Fosback’s Fund Forecaster, has extrapolated U.S. GDP data and found that, “as of this moment, we are virtually right there: a 100% recovery” in real, inflation-adjusted terms, of where the GDP was at its pre-recession peak. “And if not, then a couple or a few more weeks at most,” Fosback adds.

But while that may seem like a major milestone, few in the media have picked up on the story, Hulbert notes. “Therein lies a tale, which Fosback finds very significant when assessing the stock market’s potential,” Hulbert writes. “The lack of attention to the magnitude of the recovery has been caused, in his opinion, by ‘the extraordinary pessimism enveloping the consumer investing population, fanned by a fear-mongering financial media.’ That skepticism, in turn, has played a big role in holding the stock market back from even bigger gains in recent months.”

Fosback says that pessimism means that the bull market will likely last longer than it would have if investors were more gung-ho. He’s expecting that stocks will gain about 22% in the next 12 months, and he thinks they’ll average 11% annualized over the next five years.

Hulbert: Two Top Forecasting Models Bullish

Given the recent economic and market turmoil, there’s been a resurgence of pundits warning of a double-dip recession, or another major market crash. But newsletter-tracker Mark Hulbert says two econometric forecasters with excellent long-term track records are bullish right now.

The first is Sam Eisenstadt, the former Value Line research chairman. His model predicts that over the next six months, the S&P 500 will return about 20%. The other is Norman Fosback of Fosback’s Fund Forecaster, who used to head the Institute for Econometric Research. Fosback recently said his model expects the market to gain 26% in the next year, and 75% (12% annualized) over the next five years.

While noting that there’s no guarantee that past success will be replicated in the future, Hulbert says these two forecasters are worth listening to.

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