Evening State of Play

Wow... what a day today - truly remarkable. A dovish Fed? That's how it seemed to play out for many markets. The Fed didn't harp on risks of inflation amid a stronger economy and that sent the Dow to a fresh record on hopes that the economy will be strong enough to keep corporate earnings going, but not so strong to force the Fed to lift interest rates.

The Fed itself said it sees moderating inflation.

A dovish Fed? That led to a dollar swoon, with the dollar index falling almost to as low as 85-1/2 after again briefly (watch out for those briefs) touching the 200 day moving average. Now the dollar is suddenly just a little more than a half point above the 50 day moving average. March EuroFX surged to above $1.3060.

The dollar dip led to a big rally in gold with the April contract flying past $660 and February holding above $650. So even as my GOOG calls are likely to go up in smoke tomorrow morning as the volatility returns to normal, the overall portfolio continued to get greener this week with the gold play today and the crude oil gains earlier in the week. One thing I will say about GOOG is that one should not count their gains or losses until around 8:30 or 9 tomorrow morning in order to let the analysts to have their say. It was quite interesting that the stock printed as low as $473.21 after earnings and then managed to climb back to 494.80.

In some respects, Bernanke must be pissed, unless his bosses told him the stock market needed some goosing in which he will get a pat on the head for a job well done today. The Fed spent much of last year trying to build an image of Big Ben as the man who would throw on the "inflation fighter" cape at the mere whiff of rising prices -- similar to Dom Deluise as "Captain Chaos" in Cannonball Run. It was really getting quite desperate when Bernanke's inflation fighting credentials were being severely questioned not long after he took over as Fed chairman. "I am an inflation fighter, I really am!", he had to have desperately exclaimed on more than one occasion to anyone who would listen in those dark days early last year. Now the markets think the Fed is dovish again.

Back to gold and crude. As Jim Sinclair at http://www.jsmineset.com has been saying, gold has been taking on a life of its own, but also today helped along by some tried and true factors like the falling dollar. Jim also noted earlier in the week that the IMF is keen to change accounting rules to stop Central Banks from manipulating the price of the metal and the raft of gold ETFs has also created demand for the metal.

Press reports say crude rallied because inventories of distillates dropped more than expected. The real reason is that the market is giving the Saudi's the benefit of the doubt... don't under estimate those guys and their resolve to keep the price up. Even Bush's SPR announcement will add lasting bullish background noise in the energy market for a long time to come.

This crude rally gets me back to the stock market which actually found some support from energy stocks today. The CRB itself has shown a sharp reversal in recent days. Here's a chart of the CRB (main) and the S&P 500 (upper secondary) showing that even as commodities rallied through '05 and '06, the S&P 500 forged a mostly steady course higher. And notice too, that large dips in the S&P in October '05 coincided with a CRB rout; same when the CRB topped out in May '06.

Of course, if crude gets itself back to stratospheric levels, or if gold rallies too quickly as a warning of dollar doom, all bets are off. For today, at least, these markets were largely in sync.

Bonds rebounded following the weak Chicago PMI and that too helped the stock market. As the Zen-man says http://zentrader13.blogspot.com/ bad news that pushes bonds higher, is indeed good news for the stock market.

The net result: stock futures tonight are little changed; crude has drifted lower by 30-cents; gold lower by less than a buck; dollar little changed.