t might for a while. But have we seen the bottom? Probably not, there will come some retesting pretty sure, although this offers a little bit of a trading opportunity

We think there are a couple of reasons for the rally, and why it may last for a little longer:

• As we argued a couple of times, oil seems to have peaked, for now
• The markets were really oversold, we were due for a correction
• Earnings might provide another anchor.

First oil, we argued a while ago that it would top soon. The logic behind that was straightforward:

• High oil prices zap purchasing power out of the world economy, thereby worsening it, which reduces demand
• High oil prices will change behaviour, reducing demand and increasing supply. We noticed signs of that happening.

For instance, Toyota has downwardly adjusted it’s sales projections for this year from selling 9.85 to 9.5M cars, an effect of both developments just mentioned. And Toyota is in a far better shape than many other car manufacturers, especially those coming out of Detroit.

Today, oil prices are in further retreat, and technical analyst now say it has topped:

• WTI crude prices may have made or be close to making their highs, a technical report by PVM oil associates said Wednesday
• The top international oil broker said it sees huge resistance at the $146.45 level for WTI, and $147.73 level for Brent. “Recent flirtations with [these levels] have created a large area of range resistance, resulting in failures,” the report said.

It took some by surprise though:

• Tuesday’s downside move surprised many in the market. Rob Laughlin, a senior broker at MF global said he had not seen prices move so aggressively in such a short space of time outside war conditions.
• “I think we saw banks, funds and trade selling-all enter the market, which should be confirmed by a reduction in open interest,” he said.

Now, we think the following:

• Oil prices (bar some supply disruption or political tension) will have peaked for the medium term (until the world economy starts recovering again)
• Shares will trade higher for the short-term, but we don’t think we’ve seen the lows, we will at least retest these

Oil is one, albeit important, ingredient, but there are others:

• We still think the US (but there are significant problems elsewhere; the UK, Spain, Ireland, to name a few) housing market is key. No signs yet that we’ve seen a bottom here
• The health of the financial institutions are intimately tied up with the housing sector, another big lurch downwards in housing will certainly bring more strain to financial institutions, and we might very well get a reply of the Bear Sterns (March) or Fannies (July) saga in one form or another
• It is really extraordinary, we see articles with interviews with ordinary people, not knowing which bank to put their savings in, we see bank runs. This really is serious stuff
• What’s more, although the banking sector has declined as a method for corporate America to get financed (markets have gained at the banks’ expense), risk-averse, even paralyzed banks mean credit is hard to get, which is bad for the economy.

And consumer confidence is at an all-time low. Consumer prices are rising at their fastest pace in 28 years:

• The big rise in prices cut deeply into consumers’ earning power with average weekly wages, after adjusting for inflation, falling by 0.9 percent. It was the biggest monthly decline since a 1.1 percent drop in weekly wages in September 2005.

Now, one saving grace is that most of that rise is energy related, another is that the reduction in spending power comes just at the time the tax rebates have arrived.

But the circumstances are still so dire that to predict a bottom in shares is not wise, in our view. Having said that, the present bounce has offered something of a trading opportunity. With the Dow up 160, we would perhaps have to wait until tomorrow if you’re not in already though.