We just received and posted below the newest market update from Fred and Rob at Lange Financial Services. We especially like this letter as it reviews their actual thought process from last year when, as mentioned on here if you happened to have followed this site at times, they became very bullish after the June/July lows. It then brings up up to date as to their thinking now. As you can read below they are still very bullish going forward. This is a very good read and we learned from it as well.
LANGE FINANCIAL SERVICES
January 6, 2010 4:30PM
In August, 2010 we turned very bullish on the markets versus being modestly positive reflecting the market’s strengthening technical structure and in anticipation of the benefits of GRIDLOCK. The market successfully tested the June-August lows with pressure drying up noticeably on each test of this area. During this period, we closely followed and analyzed the interrelationships of volume, indexes and new lows during the tests of the Dow 10,000 area. It was textbook. GRIDLOCK reflected expectations of significant gains by Republicans and the end of a one-sided over spending Government. Uncertainty would steadily shift to a higher level of confidence for corporations and the U.S. consumers and thus the economic results, we believed, would steadily improve. The new Congress is likely to significantly change the excessive spending dynamics of last yearâ€™s Congress, controlled by Pelosi, Reid and President Obama.
As the rally began, the battle cry by many was that the market would go down in September and make a low in October as has happened many times historically. We fully believed that the advance would continue through this period before any modest correction. Caution and bearishness were rampant.
A correction of about 4% occurred between Election Day and Thanksgiving. November the market was only down less than 1%, supporting our bullish position and the market’s internal strength. The rally resumed in December, carrying into 2011 and trading back above the Lehman bankruptcy level in September 2008 or a two-year high.
During this period we were quite bullish reflecting the improving outlook for corporate profits and the prospects for GRIDLOCK as the Election approached. When the 3rd quarter GDP was reported, corporate profits were at a record level at an annual rate and 40% above a year earlier. We immediately thought in terms of $100 for the S&P 500 earnings for 2011 and higher in 2012 which will equate to much higher equity prices. Shortly thereafter, Citicorp, Goldman, Deutsche Bank and Bank of America raised their forecasts to the aforementioned vicinity, and simultaneously increased their market forecasts substantially to 1400-1500 for the S&P 500.
Our market targets strongly suggested new highs on both popular indexes, or 1550 on the S&P and the Dow at 14,000. We believed that a valuation of 15-16 times earnings was realistic. Valuations over 20 times earnings have been reached numerous times over the past 20 years. These projections were based on a GDP of about 3%. lt now looks like the GDP can reach or exceed 4% as we enter the New Year further strengthening the outlook for corporate profits. Many economic indicators are now exceeding expectations.
We remain very bullish on the outlook for the domestic economy. Any market correction or periods of profit taking over the shorter term is likely to be mild, similar to the pause in November. A maximum investment position continues to be strongly recommended.