Stocks set to end 2013 on a high note

NEW YORK (MarketWatch) — Perhaps you don't believe in magical elves, flying reindeer or the bull market, but there was no denying the reality of the Santa Claus rally in 2013.

Stocks are set to end the year on a high note, but investors are nervous about what the new year will bring.

"There are clear expectations the market is going to rally and will continue to do that through the end of the year. There is also an institutional imperative at the end of the year to be fully invested," said Brad McMillan, chief investment officer at Commonwealth Financial Network in Waltham, Mass.

Shutterstock.com Enlarge Image Wall Street is set to end 2013 on a high note.

While that should provide the market with continued momentum in the week ahead, investors should be looking to diversify their exposure in 2014 rather than continue to bet on a market-wide rally, McMillan said in a phone interview.

While a broad market rally isn't out of the question, it's worth noting that profit margins and earnings are "starting to roll over a bit," he said. And it may be difficult for companies to maintain or increase the rapid pace of buybacks, particularly in a rising interest-rate environment. Other underlying concerns include a continued rise in margin debt and extreme investor optimism, McMillan noted.

The American Association of Individual Investors' weekly survey showed that bullish sentiment — or expectations stocks will rise over the next six months — jumped 7.6 percentage points to 55.1%, the highest level since January 2011 , while neutral sentiment dropped 1.1 percentage points to 26.4%. Bearish sentiment fell to 18.5%, its lowest level in almost two years.

Overall, investors might want to approach 2014 with an eye on stocks oriented toward more revenue generation, which could mean screening for dividends or cash-free yields, McMillan said.

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Volume will likely remain light in another holiday-shortened week, with markets closed on Wednesday for New Year's Day.

U.S. stocks ended slightly lower on Friday, but that only marked a retreat from lofty levels as the Dow Jones Industrial Average broke a six-session winning streak. The Dow (DJIA)  and the S&P 500 (SPX)  had each added to a string of record highs over the course of the week.

The Dow saw a 1.6% weekly gain, just 1.47 points off Thursday's record close and contributing to a 25.8% rise since the beginning of 2013. The S&P 500 saw a 1.3% weekly rise and is up more than 29% in the year-to-date. Friday's close was fractionally below Thursday's record close. The Nasdaq Composite (COMP)  also slipped Friday but ended the week with a 1.3% rise and is on track for a nearly 38% rise over the course of 2013, leaving it at its highest level since 2000.

Twitter Inc. (TWTR)  is certain to be in focus next week after the stock shed 13% Friday to close at $63.75, marking its largest one-day drop since its debut earlier this year.

Nick Ventura, chief executive of Ewing, N.J.-based Ventura Wealth Management, sees scope for stocks to start the new year on a strong note.

Hedge funds and other investors appeared to take profits during the market's November pullback and will be looking to keep pouring that money back into the market as 2014 gets under way, he said.

The pace of economic data picks up after last week's light calendar, but analysts expect few fireworks. Pending home sales for November are due at 10 a.m. Eastern on Monday, while Case-Shiller home price data for October, along with the December reading of the Chicago-area purchasing managers index and consumer confidence, are due on Tuesday.