Market Preview: Tough Times for Bears

NEW YORK (TheStreet) -- It's got to be difficult to be bearish on the stock market these days.

Not because there aren't some valid reasons to be careful with equities at their multi-year highs. The list of potential headwinds has to be pretty familiar by now -- the uncertainty created by the U.S. presidential election and looming fiscal cliff, expectations for ho-hum growth in corporate profits over the next few quarters, the lingering questions about just how Europe gets fixed exactly, China's slowing growth -- but none of it seems very compelling when put against the massive liquidity pledge put forth by the Federal Reserve last week.

Couple the European Central Bank's stated willingness to "do whatever it takes" with Ben Bernanke's vow to keep filling up the punch bowl even after the U.S. economy strengthens and going against the trend on stocks right now seems like pure folly. As Bank of America analyst Ethan Harris said Monday, the Fed announced more than just your average large-scale asset purchase program

"Many commentators are treating the Fed's new policy as just another quantitative easing--QE3," he wrote. "We disagree: we think this is QE3, QE4 and perhaps QE5 combined. We expect more than $2 trillion in asset buying over the next two years."

Now that's a bazooka.

Meantime, Sam Stovall, chief U.S. equity strategist at S&P Capital IQ, observed QE3 puts pressure the U.S. dollar and broke out which sectors are likely to most sensitive to swings in the greenback using historical data dating back over the last three years. He noted value of the dollar fell 1.75% last week and 2.9% since Aug. 31, huge moves in the currency markets.

"Strength in the overall [stock] market, as well as the three leading sectors, can partly be explained by the decline in the value of the U.S. dollar, in our opinion," he said. "Since 1990, the rolling 36-month correlation between the U.S. Dollar Index and the S&P 500 price index has averaged -0.19, while reaching a peak of +0.37 in August of 1998, in the midst of the Russian debt crisis, and touching a trough of -0.72 in September of last year. Its most current 36-month reading is an elevated -0.69."

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