Stocks have rallied over 200% from the depths set in March 2009. That includes a healthy 13.7% gain for the S&P last year. Unfortunately this year things seem to be stalling out. That begs the question:

How high will stocks go?

I will explore that topic by first looking at the best case scenario. Then the worst case. And for good measure, I will give my prognostication of how it will all play out.

Hey Goldilocks! Best Case Scenario

Plain and simple the bull market will stay in place until one of two things happens:

1) Recession appears on the horizon.

2) Stocks become ridiculously overvalued and the bubble bursts (like in 2000).

Right now the US economic data shows no signs of a recession in the air. Yes, Q1 was modestly in negative territory, but that was due to transitory factors like bad weather. Economists are in strong agreement that we will return to 2-3% GDP growth ahead. So no problems here.

And yes, stocks are getting pretty fairly valued these days. However, history shows that most bull rallies don't end until way past fair value...what you might call "fully valued". That could be at a PE of 18-20. Whereas the S&P is only trading at 16X next year's earnings estimates.

So the best case scenario is that the economy returns to a healthy 2-3% growth pace. That, plus the aforementioned PE expansion, should lead to the market making new highs once again in 2015. And if the economy keeps expanding in 2016...then stocks will progress even higher.

Long story short, you should stay fully invested in this market until a recession appears imminent or stocks become bubblicious.

Look Out Below! Worst Case Scenario

The previous section provided the two main elements (recession and valuation) that would lead to the worst case scenario and full blown bear market. Note that the average bear rips out 34% from stock market valuations. That is actually a good scenario if you see it coming and get short in time to profit from the move with shorts and inverse ETFs.

However, there is one more thing that could be the harbinger of the next bear. That would be a dramatic rise in interest rates.

At first it would be good for stocks as investors would lose more money in bonds and switch to stocks as a more attractive alternative. Yet the higher rates go, the more it calls into question the true value of stocks.

Note that the inverse of the PE ratio is another important valuation metric called the "Earnings Yield". Right now that stands at 6.3% (given $130 in estimated EPS for the S&P 500 next year). That 6.3% earnings yield is still very attractive versus the current 2.3% yield on 10 year Treasuries as the average historical spread of these investments is 3%.

So now imagine that there is a whiff of inflation in the air. Or our politicians botch up our debt situation. Or the Fed raises rates too fast...any of which could get the 10 year back towards 3.5% or higher. Now stocks won't look so attractive leading to a stiff decline.

I do not fear any of these nasty scenarios playing out any time soon. In fact, even the Fed has made it clear that the slope of rate increases will be slow and steady as not to disrupt the economy. But good to know all the potential signs that would lead to the next bear market.

And My Crystal Ball Says...

The best outcome for 2015 is that stocks start trading up to 18X next year's earnings estimates. That would give us a target of 2340. Yet, this year has too many question marks abounding:

1) What happens with Greece and ripple effects to the rest of the European economy?

2) Is China's stock market decline a sign of a looming recession there, which would harm worldwide economic growth?

3) QE in other nations is devaluing their currencies...which makes the US dollar more expensive...which hurts US exporters. Will this situation worsen?

These question marks have limited the upside for US stocks this year. Unfortunately, I think that will continue a while longer. As such, I predict that 2150 to 2200 is as high as US stocks will get this year.

If these three lingering issues get resolved in a positive fashion, and the US economy keeps rolling along, then indeed 2340+ should be in the cards next year. So that says it is best to stay long the market until there are more pressing reasons to believe that a bear market is on the horizon.

Note that I am by no means a perma-bull. When the facts change, then so too will my outlook. In fact, if any of the bear market conditions discussed above emerge, you can bet that I start shorting the market with both fists. Putting my head in the sand, allowing a 30-40% mauling of my portfolio or yours, is just not in my DNA.