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Why I'm Sticking By Dow 55,000

BALTIMORE ( Stockpickr) -- Let's face it: There are a lot of reasons to hate stocks right now, what with the uncertainty with the Fed, economic jitters in Europe and emerging markets and now the ongoing battle within Congress over funding the government.

>>5 Stocks Under $10 Set to Soar

But all of that market uncertainty could help to fuel a rally to 55,000 in the Dow.

Yes, I realize that sounds crazy. But just bear with me for a minute, and I'll show you how the big index will get there.

A year ago, I made a prediction that stocks were due for significant upside. Twelve months and nearly 20% later for stocks, few of those key factors have actually changed. From a sentiment standpoint, investors still hate stocks -- and by and large, retail investors don't own them in meaningful numbers.

A perfect example of that comes from Fidelity. The fund management powerhouse is a great proxy for what the retail investor is doing with his money. Years ago, the biggest fund at Fidelity was the Magellan Fund, a stock fund. In today's post-2008 world, it's a $120 billion cash reserves fund.

>>5 Stocks Hedge Funds Love This Fall

To quote Wellington Management's Frank Teixeira: "People are protecting their investments from an event that's already happened."

Yes, we've had a historic rally in the years since the market bottomed in March 2009, but that rally hasn't been supported by buying pressure from Joe Public. Instead, it's been propped up by a combination of structural factors and institutional necessity. But as the data from Fidelity show, there's still a lot of money sitting on the sidelines in retail investors' accounts ready to move into stocks when stocks come back into favor.

A New Cycle Begins

None of this is new -- we've seen it before. There are some striking similarities between the period we're in right now and the market conditions of the late 1940s and the early 1980s. History may not repeat, but it certainly rhymes.

After the Great Depression, stocks fell out of favor for retail investors for a full decade as people protected themselves from a crash that had already taken place. The discount rate dropped to near where it is now in the years that followed, and stocks quadrupled in the decade after that. In the late 1970s, stocks fell out of favor again at the heels of the Oil Crisis, prompting BusinessWeek's infamous "Death of Equities" cover in 1979. Stocks more than doubled by the decade after that, and more than tripled by the mid-1990s.
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QQQ $106.72 0.95%
SPY $207.97 0.79%
CMG $433.50 2.98%
GRMN $43.01 0.89%
INTU $102.21 1.31%


Chart of I:DJI
DOW 17,891.16 +117.52 0.66%
S&P 500 2,081.43 +16.13 0.78%
NASDAQ 4,817.5940 +42.2360 0.88%

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