What a Week: Clouds Part

The stock market's climb this week suggests that investors may be seeing the clouds part after a three-week-long bout of volatility.

Some unwinding of the yen carry trade has not caused a massive liquidity crisis, and China's stock market is back up to new highs. And though the flailing subprime mortgage industry continued to be in the spotlight, traders were comforted when the Federal Open Market Committee carefully threaded the needle in its statement Wednesday, allowing it room to cut rates but remaining vigilant on inflation.

"The fear was that the Fed, which has seen core price inflation move from 2.6% to 2.7% in the eight months since it stopped raising rates, would abandon its data-dependent, vigilant stance on inflation just because the stock market fell 4% to 5%," says James Bianco, president of Bianco Research.

Instead, the Fed managed to loosen its tightening bias without abandoning it, which is just what the markets wanted.

"The market rallied because the Fed didn't screw up," says Bianco.

While investors dissected the Fed's missive, housing data were weak but not disastrous. Motorola(MOT Quote), Halliburton(HAL Quote) and FedEx(FDX Quote) offered up discouraging profit warnings or at least uncertainty about the economic future, but the bad news was balanced by a heavy dose of merger-and-acquisition activity.