Frank Holmes: Trying to Stop a Bull Market Has Risks

U.S. stocks have been on a tear. The S&P 500 Index has climbed a surprising 23% so far this year, as a global synchronized recovery takes shape and funds flow back to equities.

As I often say, investors take risks when they try to stop a bull run, and plenty of data suggest you might regret taking that action this year.

Consider the optimistic views from Joshua Brown, i.e. The Reformed Broker, as we have "all the rocket fuel we need for an explosion." There's no election, no war in Syria, and no taper talk. Banks are highly capitalized, stocks around the world are cheap and hedge funds' short positions are the highest since January, says Brown.

If his post doesn't convince you, we have even more ammunition, especially regarding cyclical and growth stocks.

1. Year-to-date returns of more than 20% are not abnormal.

Did you know going back to 1900, the market's annual returns have been more than 20% about one-third of the time? Take a look at the distribution of S&P 500 annual returns charted by Mebane Faber Research, which shows the possibility of stocks going higher.

If you were able to invest in the market during the entire 112 years, you would have pocketed an average of 11%. But even though the 2013 market return has been more than the average, there were more than 30 years when stocks increased more. Of course, we can't guarantee future performance, but history has seen years when stocks increased 25%, 30% or even 40% over the entire calendar year.

2. Improving economic growth prospects point to cyclical stocks to lead the way.

Last spring, our director of research, John Derrick, CFA, recognized an inflection point occurring in U.S. stocks, with cyclical areas of the market beginning to gain strength while defensive companies suddenly started lagging. Large-cap, relatively stable companies such as Procter & Gamble, AT&T and Clorox, dropped sharply at that time. If you watched the market closely, you sensed a mean reversion taking place as expectations seemed too lofty for defensives and too gloomy for cyclicals.

This was a vital signal to growth investors, and those who were paying attention to the quiet ignition of cyclical stocks were wise to take advantage of this change.