Thursday, January 26, 2012. Our forecast of the Dow is still pretty much on target. “In January 2012, the market will test out new [period] highs.

Thursday, January 26, 2012.  Our forecast of the Dow is still pretty much on target. “In January 2012, the market will test out new [period] highs. That would mean that it will break through the 12,700 barrier and run up into the 13,000’s. After exploring the 13,000’s for a while, it will discover a new psychological top between 13,100 and 13,500. The economic recovery will still not be fully on track, so I predict 13,450 for 12/21/2012.” Some are not as bearish as I, Norm Fosback for example.

Fosback, for those of you who don’t know, has been a close and scientifically minded student of the stock market for nearly five decades. For three decades he was the head of the Institute for Econometric Research, during which he authored a widely followed investment textbook entitled Stock Market Logic and edited several investment advisory services. He currently publishes a service called Fosback’s Fund Forecaster.

In the latest issue of that service, published late last week, Fosback boldly states that “the market’s fundamental position has evolved to the most favorable alignment in 20 years.” His econometric model is projecting that the stock market will rise by 19% over the next 12 months, and 89% over the next five years. That five-year rate is equivalent to nearly 14% per year on an annualized basis.

While Fosback’s model incorporates numerous different indicators that he has found to have predictive abilities, he says that the major underlying issues for the U.S. market right now are “domestic corporate profits, valuations of domestic stocks, and Federal Reserve policy.” This is what Fosback has to say about each:

• Corporate profitability is an all-time high. “Not only have pretax profits soared to match their highest levels in history, but plunging effective corporate tax rates have sent after-tax corporate profits soaring to even greater heights compared with historical norms... With after-tax profits running at 10% of the nation’s $15-trillion GDP, net additions to business cash coffers are running at least 1-1/2 trillion on an annual basis, even after dividend payouts to stockholders. At the moment, that is effectively doubling cash holdings on an annualized basis. Liquidity, in other words is enormous.”

• Despite these record profits, the P/E ratio on the S&P 500 index is back to where it stood in 1990 (when calculated on the basis of operating earnings). The decade of the 1990s, of course, was one of the most bullish in U.S. stock market history.

• “Monetary policy [is] still in an aggressive easing mode.” Interest rates remain “at record lows” and the money supply is expanding.

What about Europe? Won’t slowing economic growth in that crucial region sabotage the U.S. market, even if it were otherwise poised for a major bull market? Fosback thinks not, arguing that the media’s obsession with Europe is little more than a “sleight of hand: Look over there ... while the real action is right here.”

Are there any flies in the ointment? Of course. Ironically, though, the major such fly that Fosback acknowledges derives from how good things otherwise are right now for corporate America: “The only meaningful negative investors can take away from the current corporate profit and tax environments is that they are so favorable it is almost inconceivable they can get any better; in other words, the path of least resistance for corporate profits going forward may be down, simply because it is almost unimaginable it can get any better.”

But even if corporate profit growth slows to a standstill, which he thinks is most unlikely, the market is still likely to go up because of rising P/E ratios. Needless to say, you might not agree with Fosback’s cheery assessment. But regardless, and especially if you don’t, you need to have good answers for why the factors he mentions aren’t as bullish as he believes them to be.