At least for the foreseeable future. I have said repeatedly in the last couple of weeks that we were approaching a major inflection point for the markets generally, and particularly major financials, where fear had become irrationally extreme. I have expected to see a major rotation out of the overbought momentum trade in commodity stocks and into historically cheap healthcare and financials. Well as the Meatloaf song goes, two out of three ain't bad. Mining stocks are already down 20-25% from their Spring peaks, and the S&P energy sector is now sliding and negative YTD. Healthcare has dramatically broken out of a multi-year bear market and now looks set for sustained outperformance. Banks look set for a major bear rally, despite ongoing housing market weakness.

My view that China would see growth slide this year expressed back in March has been endorsed by none other than Goldman Sachs who now forecast just 8% GDP growth for 2008 (down from 10%) and are advising investors to underweight commodity stocks accordingly. Bit late guys. The dramatic volatility in US banks on Tuesday (see the capitulation volume spike in the chart below) and Wednesday post the reassuring Wells Fargo results endorse my view that we are about to see a sharp rally in financials from an extreme oversold level not seen since the 1987 crash.

As for oil, we saw the uptrend in place since January finally broken yesterday following a sustained slump in Natural Gas prices and the next support level is $120. Crucially, the geopolitical risk premium of $20-30 sustained by tensions with Iran may be about to disappear; seismic events in the Middle East including the exchange of prisoners between Israel and Hezbollah and a ceasefire with Hamas (both Iranian proxy armies) suggest to me that Iranian posturing (and pathetically faked missile tests) are red herrings; the US is now talking directly with Tehran at high level (and may be about to re-establish diplomatic relations after a 30 year break) and a face saving deal looks increasingly likely on their nuclear program. As US energy demand is now slumping (both natural gas and gasoline), Asian demand growth has peaked, and 800k b/d of additional Saudi supply is coming on stream, I'm expecting $100 to be tested by the Autumn, turbocharging an equity rally. Any re-regulation moves to limit index fund buying by the CFTC (and after the SEC moves on bank short selling this week, Washington has finally found religion on taming destabilising market excess) will speed the slump in energy prices.