The bulls were out in force on Wednesday triggering speculation that the rally indeed has legs.
However, investors couldn’t help but question if the sharp gains in the S&P and Dow were a vote of confidence in stocks or more of a referendum on dollar weakness.
It’s hard to ignore the fact that for the past three months the S&P and the greenback have traded in an almost perfect inverse relationship.
And again Wednesday, the greenback continued its march lower largely due to expectations of Fed easing.
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We’ve rallied 5 times on the same QE story, adds Karen Finerman. It’s been driving the market for quite some time. I can’t help but wonder if it’s getting a little played out.
I have to believe there’s a growing realization that QE2 is not a panacea of all problems, says Steve Cortes. Although the stock market erased most of Tuesday’s losses other markets such as the gold market and crude market did not gain back all their lost ground. That's telling.
But on Wednesday we didn’t follow through on the downside, adds Guy Adami. That's what's surprising to me after the big run we’ve had in the S&P. It's a sign that bullish momentum is strong and I wouldn’t stand in its way. However the action scares me.
I believe strongly a dollar rally is coming in about two weeks, says Eric Jackson of Ironfire Capital, after the FOMC meeting. As a result I expect we see a pullback in stocks as well as a pullback in commodities.
I agree that the dollar is oversold, says Tim Seymour. But when I look around the world I expect to see more pressure on the dollar as investors seek yield in other currencies. Fundamentally I think the dollar should weaken but technically it’s over sold.
If you're looking for a tell, keep an eye on the dollar/euro cross, adds Cortes. Although the euro has been hammering against $1.40 it has not gotten above that level in any meaningful way. Unless that relationship breaks further declines in the dollar is probably limited.
The traders have their ear to the ground and they’re hearing that the rally in the bond market on Wednesday may have had everything to do with the following report from Medley Global Advisors.
They said the following:
FOMC members are converging upon a decision to buy Treasuries on the order of $500 billion over the next three to six months with an open-ended commitment to purchase more assets over the following 12-18 months depending on economic developments...Pay no heed to suggestions that this is not yet a done deal. As Federal Reserve Chairman Ben Bernanke has said: given the FOMC's objectives, the “case for further action” has been made.
Source: Medley Global Advisors.
What should you make of it?
I think the trade is long the long end of the Treasury curve, says Steve Cortes. I suspect we either see stocks go higher on QE and bonds go with them. Or if stocks go lower I expect we see a flight to quality.