Tuesday, July 16, 2013

How to Benefit from the Bernanke Bounce

By George Leong

“Impressive” is the only word I can think of to describe the moves of the S&P 500 and Dow Jones Industrial Average to new record highs last Thursday.

Call it the “Bernanke bounce” if you want, but if you didn’t believe the Federal Reserve’s easy monetary policy was behind the bull market before, then you must by now.

In June, when the Fed announced its exit plan for its stimulus, the stock market sold off. Then there were a slew of muted economic reports along with the Federal Open Market Committee (FOMC) meeting minutes that suggested the bond tapering by the Fed might not happen as soon as many had thought—the response was a rally that drove the stock market to a record.

Some are arguing that earnings by Alcoa Inc. (NYSE/AA) helped, but it was only one reading. Of course, both JPMorgan Chase & Co. (NYSE/JPM) and Wells Fargo & Company (NYSE/WFC) also beat on revenues and earnings on Friday. We could see another upside push as the leadership from the big banks has helped to drive the stock market this year.

The earnings season will likely be good due to the reduced expectations. Corporate America is not exactly expanding quickly, but it is growing fast enough to satisfy the lower sights of Wall Street.

The easy money will continue to be made as long as the Fed holds back, so enjoy the ride.

The stock market is bullish. Investor sentiment continues to be extremely bullish with the ratio of new highs to new lows above 90%. On Thursday, there were 347 new highs on the New York Stock Exchange (NYSE) versus a mere six new lows.

Take a look at the NYSE New Highs-New Lows chart featured below and you will notice the recent improvement following a lapse in June. The chart shows the strength from January to late May. As long as the sentiment continues to be bullish, the stock market will likely push higher.

NYHL NYSE New Highs New Lows Chart

Chart Courtesy of www.StockCharts.com

Of course, some will argue that this artificial economy pumped full of easy money is not sustainable. I agree with that, but until there’s an alternative way of making money, your best bet is in the stock market. In other words, don’t fight the trend, as it’s pointing higher.

Even when the Fed begins to taper the policy, you will still have the easy money being injected into the global economy by central banks in Europe, China, and especially Japan, where Prime Minister Shinzo Abe is building a massive mountain of debt and is expected to inject $1.4 trillion into Japan’s economy by the end of 2014.

All of this easy money will help to drive demand in the global economy, and in turn, the stock market will likely continue to move higher.

So in spite of the negative implications of the easy money, the reality is that the stock market is still the place to be.

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