Oil on a 25mth cyclical bull run. Update 11 - 'Ultra' bullish markets push oil to $90.00.

It really doesn't matter what the US Federal Reserve does now, apart from successfully maintaining a trading range for stocks more notably the Dow trading within 11255-11500; a widen range with thin volume (...and you tell me that is stable?). The Feds/POMO operations (daily) has been an attempt, with $600billion printed money to buy short/mid dated US Treasuries (namely from dealers sold via oversubscribing), to lower the yields on UST's. Of course this has been a complete failure, with yields on most UST's fluctuated on a steeping curve. The 10yr heading towards 4.00% and the 2yr heading towards 1.00%.

So we have a bullish sentiment on the 'ultra' side, namely stocks, but most assets classes are now rallying, with bullish commentary accompanying a 'buy' signal into 2011. But as most indices are bubbles and are oversold, namely US stocks that weren't able to correct in October, November and now December 2010; what we are observing is the thin volume on marked up buys e.g 3 shares bought for 1 sold. This is not a dip buying market, but rather a 'stabilized' High Frequency Trading market, that can meltup and meltdown just as quick.

So if we have bubbles forming now in stocks (US) and bullish sentiment has clouded judgment, with the possibility of dumb and smart 'dumb' money buying into tight HFT trading ranges. What could possibly cause the market to shift south rapidly?

China.

And it's all about oil. With a $90 a barrel inflation break point for China (being oil import dependent). China has an over stimulated economy, vast over capacity, property bubble and possible bank liquidity problems. China will need to see oil much lower, any higher after a 90.00 breach will inevitably increase China's chance to go into hyperinflation, since China is now domestically driven by massive credit expansion. It will either need to crash parts of it's economy or head into an inflationary meltdown if oil climbs upward.

China crashes, the global economy crashes.

After a 20mth bull run oil hits 90.00 (Dec 2010):
*Note USD divergence.