Stocks, commodities and other risky assets blasted higher in reaction to the Federal Reserve's unveiling of what the market has already dubbed QE3. But it is, in reality, different from and far more aggressive than the previous stimulus efforts seen in late 2008 (QE1), late 2010 (QE2) and late 2011 (Operation Twist). The new effort, which will target mortgage securities, is unlimited in that it has a set target of $40 billion a month in purchases but no set end date.

The program will continue -- and could be expanded -- until the job market improves "substantially." Combined with its already extended Operation Twist initiative, the Fed will now be pumping $85 billion a month into the economy through the end of the year -- similar to the pace of monetary injection seen during the $600 billion QE2 program. And if the Fed continues until the unemployment rate falls to 7% -- which may not happen until 2015 -- the purchases could result in $1.4 trillion worth of new stimulus.

Investors reacted positively to the news, boosting the "risk on" trade as economic growth and inflation expectations surged higher. In fact, the Dow Jones Industrial Average is now closing in its 2007 peak with enough velocity and cheap-money accelerant to possibly push to new all-time highs.

Crazy talk?

Consider this: Investor sentiment has been dour and money has been coming out of stocks and moving into bonds over the last few months. Now, a reversal is upon us, with capital rotating into cyclical, economically-sensiti​ve stocks and small cap issues. This rotation has just started. And it's likely to continue. 

Why? The Fed's actions are boosting economic growth expectations and inflation expectations. Both are positives for stocks and negatives for bonds.

There will be plenty to say about the Fed's actions in the days and weeks to come. But for now, know that it will be a near-term positive for the housing and stock market (boosting both is a stated goal of Fed chairman Bernanke). And that should help boost consumer confidence since both areas are very important for net household wealth.

There is also the chance that inflation overshoots to the upside.

With monetary stimulus both here and overseas revving up, the situation is vulnerable to food and energy supply shocks that could whip up inflation. A pre-election Israeli attack on Iranian nuclear facilities is my main worry since it would cause crude oil to spike, undermine the consumer confidence boost of QE3, and neutralize any benefit of additional monetary policy stimulus.
 
This is what happened during QE2 in the middle of 2011 as a result of the Arab Spring protests.

Producer price inflation is already inching higher. The Producer Price Index increased at its highest monthly rate in three years in August. The 1.7% gain came on much firmer food and energy prices. Food inflation rose by 0.9% and energy spiked by 6.4%, which included a 13.6% rise in gas prices, itself the largest gain in three years. 

The Dow is just 425 points from 14,000. I think it will get there soon, encouraging fresh buyers to jump into a fast rising market as greed overrides fear.

As a result, I'm recommending my newsletter clients and readers harvest profits from existing precious metals positions and rotate the capital into new areas of strength including industrial and emerging market stocks. As a result, I'm adding Caterpillar (CAT) to my Edge Letter Sample Portfolio.

Existing positions include VelocityShares 3x Silver (USLV), up nearly 100% since I added it in late July; First Majestic Silver (AG), up 40%; and Market Vectors Junior Gold Miners (GDXJ), up 26%.

Disclosure: Anthony has recommended CAT, AG, USLV, and GDXJ to his newsletter subscribers.

I found CAT with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)

Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.