Stock Market Forecast September, 2015 through February, 2016: Bouncing back

My econometric stock market models are predicting a significant stock market recovery of about 10% over the coming 6 fall and winter months of 2015-2016. That bounce is despite, or more accurately, because my models had not expected the market to tank so badly during August.

Huh?

My forecasting models totally missed expecting the mid-August market panic / correction. The prediction models had been expecting a sub-par market over the summer months, reflecting the statistical fact that stock markets tend to be weak over the summer. But, no way did the models foresee the abrupt market correction that actually, and painfully, happened.

So, how is that useful information?  The answer is that the fears that moved the market (high valuations, economic weakness in China, low commodity prices, and a weak oil market) are not the basic economic forces that typically have a lasting and remarkably predictable longer term impact on U.S. stock prices. In short, the models say that the market over-reacted to bad news that really is not that important to U.S. stock prices. If history is a guide, the positive economic fundamentals will regain their importance fairly soon and the market will recover.

Morningstar.com agrees. Their Market Fair Value graph, based on net present value calculations today says that the overall market is 7% undervalued. Stocks are on a 7% off sale! (I remain convinced that this Morningstar graph is the most useful stock market indicator available for free on the web.)

So here is my 6-month forecast:
U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 9/1/2015 to 3/1/2015: 10% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : 85%  to 90%  (Average for all months since 1984: 73%