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The gift that keeps on giving to investors

It is by now a familiar story: Something threatens the health of the economy and the relentless rise of the stock market, investors get jittery, then euphoria erupts as central bankers respond with another injection of cheap money.

That plot-line is playing out out again as stocks soar in response to the Federal Reserve's latest policy statement. New highs look likely on a combination of short covering and a reversal of recent currency trends. Beneficiaries will include commodity prices, energy producers, foreign stocks and companies like Procter & Gamble (PG) that have been under pressure due to currency effects.

The Fed last week opened the door to raising rates for the first time since 2006, with some forecasters speculating that the hike could come as soon as June. But in acknowledging the hit to growth and corporate earnings from weak inflation, recent declines in U.S. economic data, and the dampening effect of the strong dollar, policymakers greatly reduced their estimates for how quickly they expect interest rates to rise.

That was the green light the bulls had been waiting for. Major price levels are being taken out. The Dow Jones industrial average is back over 18,000. The Nasdaq Composite is above 5,000. The Russell 2000 is pushing to record highs.

It's not just here at home. Japan's Nikkei Composite recently cleared the 19,000 level and is rapidly approaching 20,000, heights not seen since 2000. Germany's DAX recently traded above the 12,000 level for the first time and is up nearly 30 percent from the lows set earlier this year. Both the Bank of Japan and the European Central Bank have recently enacted aggressive new stimulus measures.

The same thing is happening in China. The Shanghai Composite Index is up 16 percent from its February lows on excitement over recent policy easing measures by the People's Bank of China.

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If you wanted confirmation that this is about the central banks -- and not about the fundamentals like earnings and economic growth -- consider two charts. The graph above shows how stocks globally have disconnected from earnings growth, fueled by an expansion of price-to-earnings multiples. The graph below shows how economic growth has stalled in the U.S., with the Atlanta Fed predicting anemic first-quarter GDP of 0.3 percent.

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It's not growth or profits that matter, but the vagaries of the currency market that are the center of attention now.

The dollar's recent rise increased hopes that a weaker yen and a weaker euro would bolster exports and reinvigorate the Japanese and European economies. But it also raised concerns that a strong dollar would dent U.S. exports and job-creation, hurt emerging market economies that have grown dependent on cheap dollar-based credit, and continue to punish commodity prices to the point of destabilization.

The Fed's dovish turn proves a sigh of relief on all these points, as the dollar turns lower. It's become clear that Chairman Janet Yellen and her cohorts aren't going to rush the policy tightening process. Rather, they will wait for the job market to tighten further and for signs of undeniable wage and price inflation.

Only at that point will the case for keeping interest rates near zero percent, where they've been since 2008, no longer appear defensible. When that happens, stocks will be forced to realign with their fundamental factors as they lose the benefits of low rates bolstering valuation metrics, boosting earnings per share calculations via debt-funded buyback programs, and forcing investors to take risks by battering bond yields.

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But we're not there yet. That clears the way for another melt-up in areas like biotechnology (as shown above). For the more cautious, recent areas of weakness such as utility stocks (shown below), transportation stocks, and precious metals are emerging from multi-month downtrends and could present attractive buys at these levels.

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Ed Yardeni of Yardeni Research has been telling clients all week to prepare for an "Irrational Exuberance melt-up scenario" thanks, once again, to the work of central bank officials.

Yardeni admitted earlier this week that this is all a bit ridiculous, and probably shouldn't be happening, but for now it isn't necessarily a bad thing. "This is not about investing, this is all about the central bankers," he clarified. "These markets are all rigged, and I don't say that critically, I just say that factually."

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