Elaine Garzarelli: Long Bull Market Now

Market analyst Elaine Garzarelli, who famously hedged her portfolio before the ‘Black Monday’ market crash in 1987, sees a long lasting bull market that could drive the S&P 500 up more than 25 percent from here as the positive effects of the Federal Reserve’s second round of accommodative monetary policy take hold.

"Japan’s Nikkei rose 50 and 80 percent after quantitative easings in 2003 and 2004," said Garzarelli, who runs New York-based Garzarelli Capital, in a note to clients. "The Fed’s new QE2 money will circulate into the system and do a far better job at creating money velocity than the cash used for QE1. We expect to see the economy growing faster than it otherwise would have, which means that stocks and commodities should continue to do well."

Garzarelli’s point is that because the Fed is buying very liquid assets ($600 Billion in Treasuries) instead of illiquid bank assets that just sat there in its first quantitative easing attempt. Therefore, the money will more easily flow directly through the economy, increasing activity many times over.

While getting out before the Dow’s 20 percent plunge on Oct. 19, 1987 is what she is best known for, Garzarelli’s predictions since then are still well regarded and widely followed on Wall Street. At one time over her long career, the analyst and economist was named the top Quantative Strategist for 11 consecutive years in Institutional Investor’s annual survey of money managers.

"Lower Treasury rates push stock prices higher and that increases consumer net worth and spending," writes Garzarelli on the effects of QE2 in her note. "The dollar is also affected by declining rates: export growth accelerates and multinational EPS growth expands."

The S&P 500 is up 20 percent from its 2010 low close in July as investors began to anticipate another round of quantitative easing from the Federal Reserve. Stocks moved higher Wednesday afternoon after the yield on the 30-year Treasury fell.

Along with the historical comparison with Japan’s quantitative easing, Garzarelli cites many other factors for her bullishness in the report, including strong holiday sales, increasing industrial production, and the Obama tax deal.

"Our indicators signal a bull market for a long time," said Garzarelli, who recommended the Consumer Discretionary SPDR (XLY), Financial Select SPDR (XLF), Industrial SPDR (XLI), the Materials SPDR (XLB, and the Technology SPDR (XLK) in the report.

Most compelling may be her valuation calculation. Relative to the low yields on Baa-rated bonds (thanks to QE2), the fair value price-earnings ratio for the S&P 500 should be closer to 17 times earnings. Applying that to her S&P 500 EPS estimate of $90 gets a fair value of 1530 for the index, or almost 25 higher from here.

"Elaine is a brilliant strategist and her multifactor model is quite bullish," said Anthony Scaramucci, managing partner of SkyBridge Capital. "The likelihood of the Fed’s policy working is only limited by their aggression to enact it."

Still the analyst made famous for getting out of the way of one of the biggest market crashes in history warns about the potential complications of trying to unwind quantative easing down the road.

"When they (Japan) withdrew QE, the Nikkei went back to 8,000 from 18,262."

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Ref: http://www.cnbc.com/id/40578145

John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.