3 reasons the rally will continue into 2014

Don't mind the bears. We're headed into another bullish year.

By StreetAuthority Dec 10, 2013 12:48PM
Image: Stock market (© Comstock)By David Goodboy

The recent stock market pullback has sparked a bearish fever in many traders.

All the major indices have slipped lower, prompting the bears to start their dance of doom. While in my view, the selling is clearly nothing but short-term profit taking and not a signal of anything ominous, it doesn't prevent the bearish fearmongers from dominating the financial media with nebulous terms like "overextended" and "overvalued."

I love it when the stock market bears crawl out of their caves. The louder they get about an imminent market crash, the more confident I become that it's not going to happen anytime soon.

These bears cite the risk of recession, the end of the Federal Reserve's quantitative easing measures, weak corporate earnings and even China's slowdown as the potential catalysts that will send stocks into the next bear market. The funny thing is, the more bears there are, the lower the likelihood of a crash or sharp correction taking place. The opposite also holds true.

When everyone is super bullish, that's when it's time to expect a market correction. Even the bears have a name for this phenomenon: climbing the "wall of worry." Stocks are said to be climbing the wall of worry when they are acting the opposite of what the bears expect. Certainly, there will be pullbacks and even a few sharp drops in every bull market, but I expect the long-term upward trend will remain in full effect well into 2014.
Here are three price drivers I see powering the bull market next year:

1. Cash inflows​
The stock market is controlled by buying and selling. These so-called inflows and outflows of capital are what determine stock prices. Investors transferred $12 billion into stock funds in just the final week of November, according to Lipper, the largest increase in five weeks. Funds specializing in U.S. stocks attracted $8.9 billion of these inflows, while non-U.S. stock funds absorbed $3.1 billion.

Research firm Strategic Insight is projecting net inflows of $450 billion for 2013 for equity mutual funds and exchange-traded funds (ETFs). This is more than the previous four years combined.

Low rates are forcing more money into stocks as investors embrace risk in pursuit of greater returns. As the stock market pushes higher, it attracts more and more money since a higher stock market increases investor confidence.

There's a common saying in financial circles that liquidity begets liquidity. This is the same dynamic at work with the stock market pushing ever higher.

2. The Federal Reserve​

Think of the Federal Reserve as the wizard behind the curtain. The world's most powerful central bank sets the economic tone by tightening or loosening monetary policy. Its powers include its command of interest rates and an entire host of quantitative tools to spark or slow economic activity. The Fed is showing zero sign of ending its QE program anytime soon and has said its decision to start tapering depends strictly on the economic data. The Fed's last statement reiterated the fact that the overall housing sector has actually slowed somewhat and an average of only 185,000 new jobs have been added over the past 12 months. With interest rates near zero, and the Feds unlikely to start tapering until well into 2014, the stock market has no place to go but higher.​

3. Stronger corporate earnings ​

I am a huge proponent of using forward-looking indicators when making economic projections. Investors are often guilty of hindsight bias when they're thinking about what's about to happen. Pure technical analysts and price action-type traders are the guiltiest when it comes to this investing sin. While forward-looking indicators contain their own faults, I have found value in using several of them. Business Insider recently reported that J.P. Morgan compared corporate earnings growth against global purchasing managers' index (PMI) readings. Earnings growth on the chart lags behind PMI by four months.
As you can see, the recent upward move in PMI is indicative of earnings growth soon to follow. This is signaling that we should soon experience an overall improvement in earnings in the first quarter of 2014.

Risks to consider: Anything can and does happen in the stock market. So-called black swan events can strike at any time, knocking stocks lower regardless of what is projected. No matter how bullish you think the future is going to be, always be sure to use stop-loss orders and diversify.

Action to take: Sticking to your investment plan regardless of the bearish chatter is the key to investment success. Work on tempering your emotions when making investing decisions.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority

Dec 15, 2013 2:29PM
Hell no as long as the government keeps pumping $23,000,000,000 a week (thats billion folks) into the economy just to prop it up preventing the collapse. Yeah the economy is really doing well. Jeshhhhhhh
Dec 15, 2013 3:08PM
How the hell is this happening? More and more people are being laid off and for those lucky enough to still have jobs, wages have gone nowhere while the price of everything else keeps going up and now you have "affordable care" which is anything but. There is a student debt crisis on the horizon and quite likely another bout of mortgage woes. ANY income growth at all is going straight to the top and when the rest of the country has degenerated into a third world slum even that will be gone as the rich migrate to other countries.
Dec 15, 2013 10:29AM
You people really think that the stock market can keep this up by all means take your shot. When the secretary-treasurer stops printing $85 billion every month to buy up bonds and securities but what happens to Wall Street is going to come tumbling down in a real hurry and then you going to blame the Republicans for like usual you Libs don't take credit for anything bad that is only the good you Libs haven't done anything good in centuries. The only thing you ever created the something to do with the tax base system. If you can't tax it. It's not a good thing. Look what we created all you Libs say that Social Security Medicare welfare and now Obama care all tax base systems. What can you create without incurring a tax on to everybody you can't please you because you won't let the free market work. It's magic. If you do that everybody wins. But no, you got a stick the federal government and everybody's business in screw things up. We the people have survived without the intrusion of government sticking their nose where it doesn't belong. So all your lives out there enjoy it because is not going to last long.
Dec 10, 2013 3:47PM
MSN pole: 
Do you think the Fed will end its stimulus program in 2014?
76 % said yes it would and 24 % no it cant...looks like 24 % of the people on this site are the smart ones.
Dec 15, 2013 8:08AM

The printing press will keep on churning Obama dollars through 2014 to try to help Barry and his congressional minions through the mid-term elections with the hope and change of overcoming his Lie of the Year.  mmm, mmm, mmm!


How many more innocent Yemenis will be killed by Barry's drone(s)?

Dec 15, 2013 9:46PM
I just want to keep my existing insurance plan.
Dec 15, 2013 11:42AM
I agree with the major points made in this article because I'm a positive investor.  I'm more bullish than bearish although I will be the first to admit that minor corrections are needed to maintain a healthy stock market.  What is not needed is fear and panic which will damage any financial market.  All the 'sour grapes' comments that I have read over the past couple of years are made by those people who either missed out on the present rally or those people that have absolutely no idea how to invest with success.  It would be better to get financially educated than to shoot off your mouth about things you don't understand.  In other words, give those of us who do know what were doing a huge break.
Dec 10, 2013 3:31PM
Dec 15, 2013 6:42PM
 nobody knows for sure what tomorrow holds for the stock market good or bad
Dec 15, 2013 9:27PM

Mr. Goodboy, with all due respect, you are delusional, or more likely being paid to reassure everyone that the market is fine.

It is not fine. It is violently f***ing sideways it what it is, and it is going to crash. All this capital the Fed is pouring into it means nothing, there is no equivalent in production to back it up. PPP is falling.

The market needs to fix itself and it needs to do it now. The last time some idiot said the market was fine and pumped billions of dollars into it, it was in two-thousand and f***ing eight!  Why are we even still dealing with this? I know exactly why, it's because s****heads like you keep telling people it is fine. IT IS NOT FINE!  It wasn't during the New Deal, and it isn't now. All it's doing is prolonging what should have been a very short recession. 

Personally, I can ride these sideways trends all day, a thousand here, a thousand there, I don't even need to look up fundamentals, I just follow the Fed. It's easy money, but it is no good for the nation.

Dec 15, 2013 5:04AM
We are in the revival phase of the biz cycle. There will only be small corrections during this bull leg through '14. Approaching 200k job growth.  No crash in that environment. Watch for the ease off phase, followed by the plunge phase much later. Till those indicators present themselves, personal credit at all time highs, housing troubles escalating, we will continue to see all time highs in the indices.
Dec 10, 2013 2:00PM
While the bears hibernate for another year all the smart bulls are getting nice and fat :)
Dec 26, 2013 10:45PM
If the feds stop printing 85 billion per month to throw into the economy it will fail fast.
Do you really think that people don't know that the stock market is artificially propped up, and that when it bottoms out, it's going to be like 2008 again?

Dec 16, 2013 1:16AM

Why the market is guaranteed to go down or "What I really want for Christmas."

1. When QE stops this stock market will fall so far that it will cease to exist. So, QE can never end. The FED knows this. As soon as the world knows this then the bond market falls apart, and interest rates go up, and again the biggest financial collapse EVER takes place.

2. The government cannot do a budget because then they would have to admit the country is broke. The United States of America, the whole country, is Detroit. You can't keep a secret like that forever. 

3. We have a debt ceiling that only goes up, not down. That is all you need to know. Eventually, up is down -- the biggest downer ever -- when interest on the debt goes up (if only by 1-percentage point). When this happens the government won't even be able to pay the interest on the debt, and "boom" game over. Sovereign default.

Merry Christmas. Happy Holidays. 

Jan 8, 2014 5:38PM

I was confused when the Fed said they would begin tapering back and then stocks rallied. I thought they would drop due to them not dumping 85 billion in bonds each month. Then I had to rethink and came to the conclusion that the Fed is giving a false sense of security by making investors believe the economy is doing better than it really is. Then I found out that the Fed only cut back to 75 billion a month. I wonder if you all know what's going to happen when investors figure out how the economy is really doing?

For the wishful 200k jobs report. That's all it is, wishful. Obamas too busy trying to get his voters back on unemployment before they can figure out that it's the libs doing all the smoke and mirrors. Obama doesn't have time to get real jobs out there. 

Dec 16, 2013 3:02AM
Uncertainty + printing money = rise in the market.  Returning foundations for economic growth + not printing money = slow market.  Easy.
Dec 16, 2013 12:22AM
I hope you are right. We shall see.
Dec 16, 2013 1:09AM
Well Mr. Goodboy, after looking at your math charts and reading your article about how you still think the market will only go up, there is one thing you have forgotten. That is the laws of Physics, and one of the simple laws of physics is "what goes up, must come down". 
Dec 26, 2013 9:21AM
This is such bad news for the teabillies.  They were hoping that their little government shutdown "stunt" would have ruined the economy beyond repair.  Looks like they've FAILED yet again.  I'm soooo loving this:-)))
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