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Bernanke's comments, last Wednesday, that the Fed is dissatisfied with the pace of the recovery is evidence that there is further weakness ahead. Their immediate action of announcing zero interest rates through 2014 is essentially the beginning of Quantitative Easing 3 (QE3). They realize that the economy is looking stronger than it really is because we are still feeling the positive effects of QE2, and if they wait until it runs out before acting, there will be too much lag time.

Up until now, El Niño has been bringing tepid temperatures and creating a beautifully warmer winter to most of the nation this year, and it's spilling over to the stock market. Just as the majority of Americans braced for the harshness of winter this year, most investors were expecting the bear market to again rear its ugly head. In reality, neither makes any sense. Winter is as usual winter, but the stock market is fighting an uphill battle and a slew of bad news.

For the immediate future however, investors should be prepared for a pullback once earnings season is over, the post earnings blues. We have had a trend for the last several years whereby the market has sold off just before earnings releases due to expected negative surprises, rallied during earnings as they have consistently beat expectations and sold after afterwards… and that's where we are right now.

However, the resilience of the market mixed in with a few positive factors should provide further strength for stocks:

  • The market is enjoying a respite to the European mess and is focusing on the recent better than expected economic news.
  • The January barometer, which implies that a good early January is often good for the stock market, has been strong and is discussed in All's Well That Begins Well.
  • It is an election year and the typical election year gain for the S&P 500 Index since 1949 is +6.1%
  • The last three times there was an incumbent Democrat in the White House running for re-election (Bill Clinton in 1966, Jimmy Carter in 1980, and Lyndon Johnson in 1964) the market made double digit gains of +20.3%, +25.8% and +13%, respectively.
  • Bernanke and the Federal Reserve Board toss us a QE3, which is likely once QE2 wears off in the next few months.

Long shots for a new bull market:

  • Every bear market is followed by a bull market. Some believe the world and most US indexes went through a bear market in 2011, leaving us at the start of a new bull market. The average bull market move in a secular bear market is +70% over thirty two months. The weakest bull advance was +48% and the shortest bull were twenty four months. Currently, the new bull market here is just three and a half months old and only up +17%.
  • From a contrarian view point, stock valuations reflect a lot of pessimism. Looking at money flows, one would say that the pessimism is excessive: currently over 8 trillion dollars are in money market and federally insured short term accounts at banks, yielding almost nothing in returns. However, I have been hearing the argument that there is an enormous amount of cash sitting around for my entire 27 years career in wealth management.

Now, keep in mind one very important lesson on investing: things work until they don't… and although all of the above can give you a sense of security to be in stocks, none of them are exactly based on firm, fundamental, or technical research. We must all be aware that the above mentioned will prove irrelevant in a matter of seconds when (not if) any of the major potential crisis erupt such as:

  • Greek and/or other Euro defaults or even potential defaults.
  • Another slowdown in the US economy, which is likely once the effects of QE2 have passed and slower consumer spending as all of the baby boomers will pass 50 years old by year end.
  • A recession in Europe.
  • Negative earnings surprises and earnings due to a continued sluggish US and European economy.
  • Congressional gridlock (Time to vote no incumbents).

All of this and more is well documented in the book Facing Goliath: How to Triumph in the Dangerous Market Ahead a must read for anybody that is retired or hopes to retire in the next 5-10 years and wants to protect and grow their families nest egg.

With a QE3 and further European Central Bank (ECB) money printing all but guaranteed, commodities are particularly attractive here. Investors should buy SPDR Gold Shares (GLD), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Goldcorp. (GG), Freeport-McMoRan Copper & Gold Inc. (FCX), Silver Wheaton Corp. (SLW) and ProShares Ultra Silver (AGQ).

Overall, El Niño will return to the market once we get through the post earnings blues, especially with the continuation of QE Mini-Me and most likely a full blow QE3. Therefore growth investors should accumulate stocks on the dip and buy: Apple (AAPL), Google (GOOG), Intel Corporation (INTC), Microsoft (MSFT), Cisco Systems (CSCO), Dell (DELL), Caterpillar (CAT), General Electric (GE) and Yahoo (YHOO).

However, investors must ask themselves the $64,000 question: Is the risk worth it? With yields of 8-10% available out there if you know where to look, why take on all the risk? Ignore the hype when the market is rising and focus on what your portfolio "needs" and take the least amount of risk possible to get there. Moderate investors should be picking up yield such as:

Bonds:

  • Edison International (EIX) 7.5% of 6/13 (cusip 281023AN). This is yielding almost 10% for less than 2 years
  • Solo Cup (SOLO) - 8.5% of 8/15/14 - yielding 15% (cusip 834260AB7)

MLP's:

  • Breitburn Energy Partners (BBEP) - yielding 9+% (cusip 106776107)
  • Legacy Reserves LP (LGCY) -- yielding 9+% (cusip 524707304)
  • CVR Partners, LP (UAN) - yielding 10+% (cusip 126633106)
  • Terra Nitrogen (TNH) -10 1/4% yield. Makes and markets farm products. One of the few hot sectors in our economy. It is yielding 8%. (cusip 881005201)

Preferreds:

  • Ally Financial Inc. (ALLYPRA) - 11.5% There are three very attractive Ally Bank Preferreds yielding around 10%. Ally is 91% government owned, so they're not going anywhere. (cusip 361860208)
  • Ally Financial Inc. (ALLYPRB) - 12% (cusip 02005N308)
Source: Bernanke Rocks The World...Again: El Nino To Continue Following Post Earnings Blues