The Dow Jones Industrial Average has just seen a major move in January 2013, with gains of nearly 6%. That was even after two days of light profit taking at the end of the month. What investors just witnessed is a classic asset class rotation out of bonds and cash into stocks. Billions upon billions of dollars have poured into the stock market, and this should underpin the big gains for stocks in 2013.

With many investors hoping for higher gains, investors better pay close attention to just how much these investor inflows and outflows can impact the prices of the stock market and the bond market. The results are astonishing and the implications are very positive.

During the subprime mortgage driven stock market meltdown from 2007 to 2009, the DJIA dropped from 14,093 to 6,627, a 53% fall, while the S&P 500 dropped from 1,500 to 683 for a stunning 54% tumble. It has taken about five years to come full circle, but now the stock market is back to where it was before the crash. After investors piled about $1 trillion into the bond market, close to $550 billion came out of stock funds, according to PNC Wealth Management, as investors sought safety and the return of capital rather than a return on their capital between 2008 and the end of 2012. PNC showed that the first two weeks of January’s rally was on about $13 billion coming back into stocks.

While many investors remained on the sidelines, now comes the realization that retirement plans and investment accounts have missed four years or more of growth for retirement and savings plans. What happens if investors fearing a bond market crash, or even an orderly rise in interest rates, start to sell out of bonds? Certainly you have heard the term “Cash never rallies!” That being said, you can expect more of the same, and that means a rotation of new cash back into stocks. This is not any assurance that stocks will rise in a straight line, of course. We have not formally lifted our 14,590 price target for the DJIA as of yet.

All bull markets, whether in stocks, bonds or commodities, begin with investors moving money into that specific asset class. Again, somewhere close to $1 trillion flowed into the bond market during and after the crash. The yield on the 30-year U.S. Treasury bond went from a 4.80% in the summer of 2008 to a 2.64% last summer. Investors bought the bonds, pushed up the price up and the yields down to historical lows.

For some time now we have made the case that, after a historic and unprecedented 30-year bond market rally, that bubble may be ready to burst. What if only half of the $1 trillion comes out of bonds? As of last month, due to uncertainty over taxes and the fiscal cliff, money was still flowing into bond funds to the tune of more than $5 billion, according to data provided by Lipper. So as of now, that one trillion or so dollars remains in bonds.

Are investors returning to the stock market? Absolutely they are. The DJIA and S&P 500 back at five-year highs did not come magically. But it still left much of Joe Public and retail investors on the sidelines. Now it looks as though retail investors were net buyers of stocks recently for the first time since 2007. Bank of America Corp. (NYSE: BAC) recently gave the three biggest reasons to own stocks, and we have detailed why there likely will be upside to our 14,590 DJIA target for 2013.

One statement that investors never want to hear is “It’s different this time.” The fact of the matter remains that it is. It is important to remember that the S&P 500 is hitting the 1,500 level for the third time since 2000. That is 13 years of essentially digging a hole and filling it back in. Technical analysts call where we are at now a “triple-top.” Having been mired in a secular bear market for so long drove many investors away from stocks, some for good.

Equity funds attracted six times the money that went into bonds in the week ended January 30, according to a Citigroup Inc. (NYSE: C) report that cited EPFR Global data. Stock funds drew $18.8 billion, exceeding the $3 billion that went into bonds. Some 58% of the equity inflows went into North American funds, with exchange-traded funds being the largest beneficiaries, according to Bloomberg.

Lipper has now reported that the four-week inflows in January were more than $34 billion, the largest four-week inflows going all the way back to 1996. If you want more data, Dow Jones quoted a TrimTabs figure showing that January’s inflows may have been the biggest ever, with a whopping $78 billion in inflows. The TrimTabs blog even recently said that some $4 billion is being created by the Federal Reserve each day, and that this is helping to rig the stock market. Perhaps the biggest question to ask is just how evident this is in the key stocks.

So, year-to-date there are only two DJIA stocks that are negative: Bank of America Corp. (NYSE: BAC) by 2.5%, but this was the best performer of the DJIA in 2012; and Boeing Co. (NYSE: BA) by about 2%, and that is due to the woes of the 787 Dreamliner. Last year’s biggest loser was Hewlett-Packard Co. (NYSE: HPQ), and it is so far winning the most of all DJIA stocks with a year-to-date performance of almost 16%. HP is winning due to the renewed buyout interest in Dell Inc. (NASDAQ: DELL). You know that the outflows of capital from Apple Inc. (NASDAQ: AAPL) have to have some investors rethinking the death of the PC. This is where inflows have been happening. If analyst Dick Bove is right, big banks could rise another 30% in 2013.

Perhaps the biggest surprise is the inflows that have come into Procter & Gamble Co. (NYSE: PG), as it is the second best DJIA stock, with gains of 11.6%. With a $205 billion market cap, that is a theoretical $20 billion or so that has ended up flowing into P&G before you consider gap-ups and market maker price changes. While J.P. Morgan Chase & Co. (NYSE: JPM) is up almost 8% year-to-date, its $179 billion market cap implies that almost $15 billion of market cap has been added before gap-ups and market maker price changes. Yet again, more and more evidence of big inflows of capital as it takes real world money to push up these giant stocks with big market capitalizations.

Again, the biggest issue to consider is that nobody owns stocks above this level in the broad markets. So as the market goes higher, you will not have any investors finally able to sell long-time losers. Remember the stock markets have rallied to these highs with high unemployment, a sluggish economy, where last quarter’s gross domestic product (GDP) was actually negative, budget and deficit fights in Washington and a host of other worrisome issues that usually weigh on equity markets. What if the economy improves and Congress agrees on the debt limit and spending in 2013? We even have been tracking broad changes of sentiment around the troubled spots in Europe.

One of the main points for investors to remember is the $1 trillion remains locked up in bonds. We have written frequently about the bond market bubble and what could happen if it bursts. The good news is that may be a slow and orderly exit ahead of the Federal Reserve’s endless asset purchases and quantitative easing. At least we hope that is the case. Barring a complete economic collapse, this bond purchasing will end at some point, and the end of 2014 or the start of 2015 is a lot closer now that we are into 2013.

You may want to read our December article, “A How-To Guide on the Next Big Short: Treasury Bonds.” When we wrote that story on December 5, the yield on the 30-year Treasury bond closed at 2.77%. Recently it was as high as 3.21%. That kind of sell-off in Treasury prices could very easily move all or part of that $1 trillion out of the bond market. Not a single investor can say that his cash rallied over the past four or five years, and if investors are smart enough they will admit that inflation actually eroded the purchasing power of that cash. If cash never rallies, then solid equities with solid dividends and healthy balance sheets are likely to win again.

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