Tags: stocks | rally | etf

Kotok: Pullback Possible, but Don’t Bet On It Yet

Friday, 17 February 2012 12:19 PM

A stock pullback is probably in the cards, but don’t bet on its timely arrival, says David Kotok, chairman and chief investment officer at Cumberland Advisors.
First, rallies driven by central bank are “extraordinarily strong,” says Kotok. Trillions of dollars flood the world’s economies, thanks to bank actions, and short-term rates are close to zero.
“If you use the short-term rate to compute an equity risk premium, you get a huge number,” he writes in a weekly commentary. “Of course, we know that zero is a poor standard. Moreover, we know that it will not last forever.”
The lure of easy gains is bringing cash off the sidelines, feeding the rally, he points out. Second, the stock market’s aggregate value compared to the economy is high but nowhere near peak levels seen in 1999 and 2007. In any case, this measure is a poor indicator for market timers, he says.
Finally, while extremes often turn out to be wrong, a bullish crowd of investors can nevertheless drive share prices upward for long periods, Kotok warns. Demand for stocks has risen in the face of short supply. That means prices will rise, he points out, probably by about 10 percent a year, based on data from Ned Davis Research.
Cumberland will stay in its U.S. stock ETF accounts, he concludes. “We are also watching warily as the political circus unfolds and as the calendar progresses thru the early part of the year when stocks have an historical upward bias,” Kotok writes. 
Kotok’s view is echoed by Wharton finance professor and longtime stock bull Jeremy Siegel.
He has a simpler explanation for why the market run of early 2012 is likely to continue: Relative to bonds, they’re a bargain.
The author of the bestselling “Stocks for the Long Run,” Siegel bases his research on more than a century of data. He sees Dow 15,000 and maybe higher in the coming two years, perhaps 17,000.

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Friday, 17 February 2012 12:19 PM
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