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Why Stocks Rallied Today

Stocks rallied at 9:45am ET as the June Chicago Purchasing Managers Index (PMI) came in a 61.1, well above expectations of 54; new orders 61.2 also above expectations. Why do we care? It was the first regional report that showed upside strength in a while...and Chicago is close to Michigan, which means....cars. The Dow is now in positive territory for the quarter.

On QE2 (quantitative easing): It is a mistake to think that because the markets are up this week, that is an indication that no one cares about QE2 ending.

I say that because we are approaching the end of a very peculiar quarter: bonds have notably outperformed stocks (the 10-year has outperformed the S&P by almost 8 percentage points), and it is highly likely much of this week's action is due to fund allocations into stocks to raise equity exposure.

Regardless, it's absurd to argue that QE2 ending hasn't changed trading patterns. The greatest trade of the last year (maybe the decade) was created by QE2 and has shown signs of unwinding for 2 months.

I'm referring to the "short dollar/long commodities/long commodity" trade, which dropped the dollar 10 percent in the last ten months and caused a pop of over 40 percent in energy stocks, over 30 percent in material stocks.

Traders made a veritable fortune on this trade, because traders could make the bet and stick with it for months...the Fed, after all, clearly telegraphed how long QE2 would last, and how much would be spent.

But this trade has not worked well since the end of April. Many have argued that the Greek crisis torpedoed the euro and put an early end to the rally and to the "short dollar/long commodities/long commodity" trade. There may be some truth to that.

At any rate, that famous trade is long in the tooth, but not completely dead. If the euro can continue to rally, and we continue to reverse the string of disappointing economic news (as we did today with the Chicago PMI), and the Fed continues to keep short term rates near zero as Europe raises rates...that trade can continue to work. But you can thank the Fed for creating the trade.

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