What Can Go up 20% in 2014?

The broad market has had a great year, with the S&P 500 up nearly 26% so far in 2013. Yet given the ebb-and-flow of markets, we need to ask ourselves: how likely is it that the market is going to log this same kind of gain in 2014?

I suspect that stocks will not have the kind of relatively care-free year they had this year, but that doesn’t mean the bulls are going to run and hide. It also doesn’t mean there won’t be other areas of the market ready to make their own 25% upside move.

This time of year always brings out my forecaster hat, and while I am not predicting a specific move in the markets here, I do think there are some segments that have potential to see a 25% upside move if conditions are right.

One of the sectors is commodities. Closely related to this sector are emerging market stocks and country-specific exchange-traded funds (ETFs) pegged to commodity-rich countries.

If we take a look at the chart here of the PowerShares DB Commodity Index Tracking Fund (DBC), we see a marked move to the downside for most of the year. And though there has been a bounce off of 2013 lows in November, commodity values still are very depressed.

If, however, the economy picks up next year, and we’ve already seen evidence of that here at home, in China, Japan and Europe, then commodity consumption will likely rise, and so too will the price of DBC.

Of course, countries that produce commodities also will likely benefit from renewed global consumption, and that means a rebound in many emerging market nations. Brazil is one of the biggest commodity countries, and in 2013 stocks based in that country didn’t fare well.

The chart below of the iShares MSCI Brazil Capped Index Fund (EWZ) shows a big decline in the fund midway through the year, as well as over the past couple of months.

Here again, however, this beaten-up sector could see a strong rebound if the global economy continues improving, and if the commodity space heats up again.

I realize there are a lot of “ifs” here. But when looking for potential market opportunities going forward, it pays to play the “what if” game. Of course, you don’t want to act on this game until you know you are likely to be correct. Yes, this is easier said than done, I grant you. But to enjoy big gains, you have to identify sectors likely to be driven by all sorts of factors.

The potential rebound in the global economy, a reigniting of commodity consumption, and a boost in commodity-producing countries are just such factors. So, if you are seeking alpha in your investments in 2014 (and aren’t we all?), then keep commodities and commodity countries on your watch list.