The markets today: rotation, and end of the fear trade?

1) The dollar rally has ignited market rotation: money is coming out of commodities & commodity stocks -- and into financials. The strangest part of the action today is the rather noticeable up moves in banks, as well as home builders. The bank index is up almost 5 percent, on heavy volume; the residential housing index is up 4 percent. What's going on?

Traders feel that the Federalo Reserve is signaling that the credit crises, while not over, is easing enough for them to turn their attention to inflation. Hence all this discussion that the Fed is nearing the end of its rate cutting, which was sharpened by the Greg Ip story this morning.

If the Fed's not so worried, maybe we shouldn't be so worried. Also, remember that while there has been a lot of short covering in financials, many have still not jumped back in and owned them to a significant extent.

As for housing, the numbers are no comfort, but again traders believe that none of the biggest builders will go under, and that capital raising will be minimal. I'm not convinced there will not be capital raising, however.

2) S&P again approaching breakout levels. In this case, passing 1395 -- the closing high on February 1 -- would break a pattern of lower lows that goes back to October of last year. In February, and twice in April, we approached these levels and failed; bullish traders have been burned at this level before.

If we clear these levels, what does it mean? The fundamentals are still bad -- just look at the horrifying new-home sales number this morning -- but it's a sign the Street is already looking past these ugly months.

3) Gold and bonds: the fear trade lessens. The VIX is at its lowest level since December, and this may be the day that traders are finally convinced that gold and bonds have topped out. If the Street becomes convinced of that, stocks will benefit even more.

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