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Record stock rally to continue as funds chase performance

The record run for the S&P 500 Index (^GSPC) and the Dow Jones Industrial Average (^DJI) has left a good chunk of fund managers, about 76%, in the dust this year, according to Morningstar.  

For Thomas Lee, founder of Fundstrat Global Advisors, this underperformance is a signal that stocks have a lot of firepower left. “Historically when fund managers trail - and this is really one of the three worst years in twenty - the October to year-end move is even bigger.” Lee notes that fund managers will be forced to chase the top-performing stocks. “Whatever has been working this year basically gets turbocharged and people pile into those names.”

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Some of those leadership names this year include Tesla (TSLA) which is up 67%, Facebook (FB) which is up 35% and Apple (AAPL), up 40%. As for sectors, the PowerShares QQQ (QQQ), which is primarily tech, is up 17% and the Utilities Select Sector SPDR ETF (XLU) is up 18%.

Lee is betting his theory will push the S&P 500 up another 3% to 2100 by year-end.  His bullish stance was reinforced by the market’s sell-off followed by what was a rapid recovery during late October, trading he describes as breathtaking. “It's a reminder we are in the middle of a bull market; that’s the regime we are in.”

The bull market regime is not immune to risks such as the further weakening of Europe’s economy and geopolitical events, says Lee, but he remains optimistic on Europe. “I think Europe starts to improve because of the weaker currency and the drop in oil prices.”

Thursday Oil prices slid to the $74 a barrel level, a four year low.

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