ANALYST: This Is 'The Classic Setup For A Q4 Melt-Up Rally' In Stocks

Battles in Washington over raising the debt ceiling and how to continue funding the U.S. government may be starting to weigh on the stock market.

“We continue to prefer the stalemate of debt and budget talks in Congress as the primary driver of nearby price action,” says Andrew Wilkinson, chief economic strategist at Miller Tabak.

ConvergEx Group chief market strategist Nick Colas, however, argues that “the debate [in Congress] doesn’t change the near term and positive dynamics of a still-easy Fed, reasonable valuations and the classic set up for a Q4 melt-up rally in U.S. equities.”

Here’s why Colas is bullish, despite the rumblings in Congress:

Declining interest rates may not be enough to entirely spare U.S. equities from near term volatility, but other factors should ameliorate any substantial market decline through the balance of 2013. The Federal Reserve is still fully engaged with its bond buying program. Janet Yellen, favourite of Congress and Wall Street, now seems to be the front-runner for the Fed Chair spot. There is even chatter that Chairman Bernanke may not be out of the running, if Obama advisor Warren Buffet’s latest laudatory comments are any sign.

Then there are the odd dynamics of year-end investor psychology. Even with the choppiness in stocks last week, our friends at show that one-week money flows into exchange traded funds were positive to the tune of $US21 billion over the same period. Most of that money – $US20.5 billion — went into stocks. That mirrors the money flow action for all of 2013 year-to-date, with $US140 billion flowing into equity-based ETF products and $US96 billion into U.S. stock fund alone. Even U.S. equity mutual funds are showing positive flows in September, to the tune of another $US1.5 billion through September 11.

The bottom line: we may get some volatility from the events in Washington through the last part of September and October, but the money flows into stocks should be a decidedly more positive fundamental. It has taken investors — especially retail and conservatively minded investment advisors — a lot time to get comfortable with owning stocks again. As we ramp into the final quarter of 2013, the gains over the year and easy money from the Fed will be the kindling and match to light further equity market gains.

Last week, ahead of last week’s shocker FOMC decision that sent stocks soaring (they’ve since given up most of their gains), investors piled the most money into stocks on record.

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