Oil has bounced off of a strong rising trend line. In addition, the Oil futures hit a Weekly DeMark Sequential (TM) Buy reading three weeks ago. A move back to the $70s in the oil futures would almost certainly put a damper on any equity rally.
Source: Bloomber
In addition, the concerns over a flattening yield curve remain. Typically, flattening or flat yield curves have been associates with a falling stock market. While the current yield curve is still in a very healthy rising position, the forward yield curves show that traders expect the curve to invert at the short end (one month to five years). The chart below shows the shape of the expected yield curve at 3/6/2006, 6/6/2006 and 12/6/2006. You can see that traders expect the long end of the curve (10 to 30 years) to remain steady, while the short end continues to rise as the Fed raises rates. The 6/6/2006 (marked by the green 3) yield curve is parochially flat from the one month to the two year duration. Interestingly, traders are already pricing in a Fed rate cut by 12/6/2006 (marked by the purple 4). So traders are already taking into account that the Fed will overshoot and have to lower rates by the end of 2006.
Source: Bloomberg
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