Oil traders focusing on short-term fundamentals

Quote of the Day

When words leave off, music begins.

Heinrich Heine

The short covering rally not only continued throughout Tuesday's trading session but the upside momentum actually increased during the course of the trading day. The same was not exactly true for the equity markets which peaked in value well before the close. At one point the US Dow was up well over three hundred points on the day but settled well off of the highs for the day suggesting that most market participants still have very little confidence that the end of the downturn is over just yet. That said most all risk asset markets gained value today and that is a far cry from the daily performance taking place just a week ago.

The main impetus for today's rally was driven by positive news coming out of Europe as my main question/concern discussed in Tuesday's newsletter was starting to get a partial answer and that involved adding more liquidity to the EFSF (European Financial Stability Fund) for use in bridging the gap during the evolving sovereign debt issues. It is still not a permanent and long term solution but it is one step in the right direction that helped to clear some of the uncertainty that is continuing to cloud Europe. Further helping to support today's short covering rally was a small bump up in US consumer confidence and a rise in home prices.

As I elaborated in Tuesday's newsletter a lot of questions (besides those around just Europe) will have to be answered before there will be enough confidence that a trend will remain in place for more than a day or so. In addition the way the market traded today also highlights that most market players have a very short time horizon for the majority of their risk asset trading...especially when trading from the long side. What we have learned so far is all of the up moves have been short covering rallies and market participants are very reluctant to keep any long positions on for any length of time especially those on the financial side of the market. Continue to stay short term until more of the questions are answered and also remain diligent in employing tight, trailing stops in all of your trading as there are likely to be many more days like today when big gains disappear pretty quickly.

The global equity markets were a positive for the oil markets for most of the US session. However by the time the close rolled around the US equity markets gave back more than half of their earlier gains as most players booked profit and went to sidelines as they still deem the overnight risk to be well greater than the potential reward. The US markets ended the day in positive territory and the EMI Global Equity Index gained ground as well as shown in the following table. Ahead of the opening in Asia the Index has gained about 2.5% over the last 24 hours widening the weekly gain to 2.5% as the year to date loss narrowed to 17.6% and remains below the bear market threshold of 20%. Nine of the ten bourses in the Index continue to show double digit losses for 2011 with the US Dow is still losing the least in the list of bourses while Hong Kong holds the bottom spot in the Index. Most of the European bourses staged a strong short covering rally on news that the EU is making progress. The US market lost a portion of its earlier gains as we approached the close. At the moment the global equity market are still acting as a short term positive price driver for oil prices as well as the broader commodity complex.

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