Tuesday, September 06, 2011

Dow 13,000 in Sight

Dow 13,600, here we come

Eminent analyst forecasts 18% market advance over the next six months

Sam Eisenstadt is projecting a powerful rally

CHAPEL HILL, N.C. (MarketWatch) — Here’s some cheery news to usher investors into the long Labor Day weekend:

One of Wall Street’s most eminent analysts is forecasting an 18% return for the stock market over the next six months. If he’s right, the Dow Jones Industrial will be trading around 13,600 by next February, and the S&P 500 index will be above 1,420.

The analyst is none other than Sam Eisenstadt, the former research director at Value Line. Prior to his retirement in late 2009, Eisenstadt had spent 63 years at that firm. At the time, its flagship publication, the Value Line Investment Survey, was in first place for risk-adjusted performance over the three decades the Hulbert Financial Digest had been tracking advisory performance.

Though in retirement, and well past the age when most others have long since given up following the market’s daily gyrations, Eisenstadt remains as close a student of the stock market as ever.

One of his areas of focus is a complex econometric model that forecasts where the market will be in six months’ time. The inputs to his model are monthly readings of numerous economic and financial variables over the last six decades — back to 1952, in fact. While Eisenstadt stresses that no model is perfect, he reports that the model’s track record over the last six decades have been statistically quite significant.

(For the statistically minded among you, he reports an r-squared of 0.45 for its six-month forecasts since 1990.)

During the time that I have been reporting Eisenstadt’s forecasts on this website, they have for the most part acquitted themselves quite well:

•In December 2009, Eisenstadt forecasted a 20% return for calendar 2010. The Wilshire 5000 actually gained 17.2% for the year, after dividends. Not bad.

•In December 2010, Eisenstadt forecast an 11.9% return for the first half of 2011. The actual return of the Wilshire 5000 total-return index: 6.1%. Again, not bad.

•This past July, I reported that Eisenstadt’s model was forecasting a 5.7% return through the end of the year. Though four months remain in that forecast, the market since then has fallen 8%. The best you can say in this case is that the jury is still out.

In an email earlier this week, Eisenstadt reported that his model is sticking to its bullish guns — forecasting an 18% return over the next six months.

Eisenstadt conceded that such a return “sounds too good to be true.”

But, he added, he’s learned over the years “not to question the numbers [produced by his model] nor attempt to rationalize them.”

Eisenstadt’s forecast is consistent with the bullish conclusion I reported earlier this week from a contrarian analysis of advisory sentiment.

You might wonder, however, how his forecast can be squared with September’s reputation as being bad for the stock market. Note carefully, however, that even if this coming month turns out to be a disappointing one for equities, there will remain five more months after September for the market to live up to Eisenstadt’s forecast.

We can only hope that it’s on target.


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