August 27th, 2009 by AdvisorAnalyst

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With the market up over 50% since March lows, many are calling for a 10%+ pullback and advising caution. It may be a good time indeed to take some money off the table.

Others, though, like Laszlo Birinyi, founder, Birinyi Associates, and Barry Ritholtz, CEO, FusionIQ, and prolific author of The Big Picture blog, believe that the market has the capacity to surprise.

Birinyi says the recovery in the economy and earnings could far exceed expectations, and the market is pricing in the upside surprise.

Birinyi Says Stocks Rally Signals Economic Rebound, August 24, 2009, Bloomberg.com

Birinyi said on May 20 that the S&P 500 would climb to a record 1,700 in the next two or three years, a 66 percent gain from its current level. The index has rallied 14 percent since his forecast. The benchmark for U.S. stocks may rise 6 percent to 1,087 within the next three months “if it continues to progress at the rate it’s been progressing,” he said

Waiting for Economy Roubini Can Believe In Means Missing Rally, August 26, 2009, Bloomberg.com

“We’re looking at a bull cycle in phase one,” Laszlo Birinyi said in a telephone interview yesterday. Birinyi was the top-ranked Dow Jones Industrial Average forecaster for most of the 1990s on PBS’s “Wall Street Week with Louis Rukeyser.” “No one wants to come out and say, ‘This is a bull market.’ Everyone’s just dancing around the term,” he said.

Barry Ritholtz says the market has the strength and capacity to surprise us higher, now that fund managers are buying this rally, according to the Merrill Lynch Survey of Fund Managers:

“Professional money managers are buying into the rally in a big way, according to a Merrill Lynch Survey of Fund Managers:

• 75% believe the world economy will improve in the next 12 months. That’s the highest level in nearly six years and up from 63% in July.
• Average cash balances have fallen to 3.5%, the lowest since July 2007.
• 34% of managers surveyed are now overweight stocks, the highest since Oct. 2007.
• Risk appetite is also increasing, to the highest levels in two years.

Reuters: August 19, 2009 – Merrill Lynch Fund Manager Survey Finds Economic Optimism Highest Since 2003 as Investors…

Investor optimism about the global economy has soared to its highest level in nearly six years, with portfolio managers putting their cash back into equity markets, according to the Merrill Lynch Survey of Fund Managers for August.

A net 75% of survey respondents believe the world economy will strengthen in the coming 12 months, the highest reading since November 2003 and up from 63% in July.

Confidence about corporate health is at its highest since January 2004. A net 70% of the panel respondents expect global corporate profits to rise in the coming year, up from 51% last month.

August’s survey shows that investors are matching their sentiment with action, by putting cash to work. Average cash balances have fallen to 3.5% from 4.7% in July, their lowest level since July 2007.

Equity allocations have risen sharply month-over-month with a net 34% of respondents overweight the asset class, up from a net 7% in July. Merrill Lynch’s Risk and Liquidity Indicator, a measure of risk appetite, has risen to 41, the highest in two years.

“Strong optimism in August represents a big turnaround from the apocalyptic bearishness of March. And yet with four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains,” said Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research. “The equity rally has been narrowly led by China and tech stocks. We have yet to see investors fully embrace cyclical regions such as Japan or Europe, or Western bank stocks.”

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