Why Stocks Likely to Head Higher into the New Year

retail sectorToday is Cyber Monday, when consumers will flock online and spend over a billion dollars. In 2012, $1.47 billion in sales occurred on this day and the expectations are that the number could swell to $1.68 billion today. (Dengler, P., “Cyber Monday Predictions For 2013,” Business2Community.com, October 28, 2013.) We will also find out today how Black Friday and the key weekend shopping period were for the retail sector. A big surprise and the stock market will reach higher.

The stock market has shown little signs of wanting to slow and is continuing to show bullish investor sentiment and the ability to move higher this month and into 2014.

The S&P 500 is at 1,800 and the DOW Industrial at 16,000. The positive momentum is in place for additional gains. The S&P 500 moving to 2,000 next year, up 11.11%, is realistic depending on what the Federal Reserve does and how the economy behaves. The Dow 20,000 may have to wait a few years. Of course, this is contingent on the five-year bull market holding.

On the charts, technology and small-caps continue to lead the broader stock market higher. The NASDAQ closed above 4,000 for the first time since September 2000, when the index was on the decline after trading at a record 5,132 in March. The buying in technology and growth is not a surprise, as buyers have chased risk and potential this year. The top sectors offering the most sizzle at this time are Internet services, mobile, and social media.

COMPQ Nasdaq Composite Chart

Chart courtesy of www.StockCharts.com

Small-cap stocks continue to lead the pack this year as the economy recovers, albeit at a slower pace than we would like to see.

As I said, a strong Black Friday and Cyber Monday could be enough to drive the stock market higher and lead to buying in January. Of course, don’t forget that the government and Congress will still need to resolve the budget and set a new debt ceiling limit by the extended deadlines.

Many of you are probably thinking about what to do.

While the creation of stock market wealth is fantastic for market participants, I’m growing more wary with each record and feel the stock market is vulnerable to selling. The fact that we have yet to see a stock market correction of 10% or more during this bull market is worrisome.

Or maybe it’s an ideal situation for the stock market, with steady but muted growth, low interest rates, benign inflation, and cheap accommodative monetary policy.

At this point, I feel the buying in the stock market is somewhat euphoric and based more on the Federal Reserve’s easy money policy than solid underlying fundamentals. The Federal Reserve will stay status quo. The next chair of the Federal Reserve, Janet Yellen, is dovish towards the use of monetary policy to stimulate the economy. Yellen has suggested how the low interest rate environment allows the central bank to employ its loose monetary policy to drive the economy and not fear inflation. Given this, I expect the bond tapering might be slow whether it begins in December or the New Year.

And while I still feel the stock market is vulnerable to selling, which would present a buying opportunity unless the underlying fundamentals change, my feeling is that the next moves will continue to be higher on the charts, so enjoy the ride. Again, with tax year coming to an end, you should also make sure you take some profits off the table and match the gainers with some losing positions prior to the year-end. And, as I’ve said on many occasions, you should hedge against potential weakness with put options on either stocks or the indices to help protect your gains. (Read “Five Profitable Plays for the Coming Stock Market Correction.”)