This commentary originally appeared Jan. 10 at 8:45 a.m. EST on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass' strategies and commentary, click here. NEW YORK ( RealMoneyPro) -- I have rarely been accused of being an economic/stock market cheerleader, but I believe the U.S. stock market will surprise to the upside in the near term for the following fundamental, technical and sentiment reasons: 1. Poorly positioned market participants: Forget put/call ratios, Investors Intelligence and AAII readings -- investors (of all shapes and sizes) are now negative and could be caught offside. Watch not what they say; watch what they do. And the dominant investors (retail and institutional/hedge funds) are underinvested and/or skewed disproportionately in a "flight to safety" into fixed income over equities. Individual investors have taken out $450 billion from domestic equity funds since 2007 and have added $850 billion into bonds; that swing of $1.3 trillion is unprecedented in history. Hedge funds, according to ISI, are now at their lowest net long exposure since the Generational Low of March 2009. 2. Technical breakout: We closed trading on Monday right at resistance in the major indices. Given the sharp rise in futures overnight (+12 handles), we will easily pierce through resistance at the open and break out of the recent trading range. This action will encourage technically based chasers of market momentum. 3. Big rotation: The rotation from high-octane, high-beta leadership ( Priceline ( ( PCLN)), Google ( ( GOOG)), Baidu ( ( BIDU)), etc.) has investors poorly positioned. Google's sudden weakness, in particular, has scared a number of hedgehoggers I know into materially raising cash in recent days. Meanwhile, financial stocks have been meaningfully outperforming in 2012. Don't market historians tell us that a better tone for the financial sector is a necessary condition and reagent for a better stock market? Yet that turnaround of the financial continues to be treated with skepticism by most. (How many times have you heard that the sources of banking revenues are greatly reduced in "the new era" for banks (see bank analyst Mike Mayo's comments on CNBC over the past few weeks as an example) and that return on capital is destined to be in the single digits given that the industry is a regulatory piñata in an era of populism? >>Uncover short-term trading opportunities at Real Money Pro. Click here for more information. 4. Mispaced preoccupation with Europe: The European situation has improved. Timid policy response is moving toward "shock and awe" -- yet investors are still scared to wake up every morning to rising sovereign bond yields, and that fear is keeping them sidelined. Unicredit's deep discount rights financing (and the specter of more dilutive bank refinancing) have especially scared investors in the last week. But who cares at what price Unicredit and others finance ... as long as they finance! Deep discount capital raises dominated the U.S. banking landscape three years ago, and now our banks are positioned well in terms of liquidity and capital (and most experienced outsized market advances in their shares following their 2008-09 refinancings. As to the weakening euro, as I mentioned in yesterday's opening missive, a weak euro and a strong U.S. dollar only helps our capital markets as more investors buy American at the expenses of other non-U.S. markets. I see the rotation into U.S. stocks and out of non-U.S. stocks as a dominant theme in 2012.
5. Recent earnings cuts discounted: Yesterday we heard on eight separate occasions on CNBC that earnings cuts are at a near-record level. But we heard it principally from those who failed to see a more worrisome economic and stock market climate (contraction in valuations) last year. Enough said. Memo to negative strategists: The market has likely already discounted (with a 15% decline in price-to-earnings ratios in 2011) a diminished profits outlook. 6. Likely regime change in the U.S.: Though the odds of a Republican presidency have improved, most investors are ignoring this "market friendly" development that could occur within the next 12 months. 7. Better economic data: Consistently ignored have been improving domestic economic releases (PMI, consumer confidence, housing, automobile industry sales and jobs). Fourth-quarter real GDP growth should be 3% to 3.5%. But more important is that the prospects of a self-sustaining U.S. economic recovery have been more solidified in the past six weeks. (I continue to be of the view that ECRI's Lakshman Achuthan's recession call is wrong-footed.) 8. Contained geopolitical risks: Investors remain justifiably fearful of North Korea and Iran. But, geopolitical risk will be a constant risk in our life and in our investments. We should monitor but not let geopolitical issues predominate our investing thinking. 9. Market-friendly rates: Low interest rates around the world in 2012-13 mean that any model based on interest rates results in a very inexpensive market valuation. Risk premiums, for example, hit a 37-year high recently. We have to go all the way back to 1974 to see similar levels -- and in 1975 and 1976 the S&P 500 index returned 35% and 19%, respectively, after a similar spike in risk premiums. (I continue to expect a massive reallocation trade out of bonds and into stocks.) 10. Lower volatility: Crazy market swings scared off and alienated investors over the past year. Shouldn't the recent collapse in volatility help bring back investor confidence? For these reasons, I continue to take the variant view that the U.S. stock market could surprise people to the upside in the near term.