Can Bernanke Drive the Stock Market?

Yesterday, the S&P was down about .5% and the DOW was off almost 1%. The advanced decline ratios were also weak but no new trend seemed to be evident. We have been discussing the need for corporate bonds and loans to continue their rally before the stock market can head much high and start a sustained bull market. Today, there is a rumor that the Federal Reserve is going to focus on buying unwanted loans and bonds to stimulate those markets. If successful, Mr. Bernanke will be the stock market's hero.



Oil prices continue to rise as does copper. Perhaps the Israeli conflict and the Russian dispute with the Ukraine created the impetus for such moves but perhaps a bottoming of the economy is also being seen by the market. We don't know what the truth is but the tea leaves must be watched. At year-end we listed some stocks that could do well over the next few years and lately we have been buying long-term calls on stocks that could perform well should the stock market surprise everyone this year and go up 25-40%. We think this is a possibility and so we want to add some big upside to the portfolio. We are focused on cyclicals that have dropped 80-90% which could rebound strongly if the economy starts to turn up in the next year or so.

Of course, we still remain fearful every day as to what the market will do. Even though we have seen some good returns in the last ten days, it is hard to get too excited. Therefore, as the market rises, we buy puts on the S&P with some of our profits to protect the portfolio from negative surprises.

Bull markets climb "walls of worry". Many investors are worried and the market is still climbing. Negative economic news and poor corporate earnings are announced every day but the stock markets seem to be absorbing them better. Have low interest rates, massive liquidity, and fiscal stimulus already started to change investor psychology? The VIX fear factor has been declining and the credit markets are improving. Perhaps we are in a new bull market already and in three months we can look back and be happy we participated in some of those gains. It is not time to gamble in the market but large liquid companies are still the proper recipe but we are now sprinkling in some good upside while protecting the downside.