Equity markets have been trading higher for the second week in a row. Bullish sentiment among investors is soaring at the moment, and on Tuesday the S&P 500 hit new highs for 2009.

The reason for the rise comes from better-than-expected housing results in the US on 17 July and again last Thursday; the continued upbeat earnings in corporate America; and the news that CIT Group reached a deal with its bond-holders to stave off bankruptcy.'

Caterpillar's Q2 earnings were one of the most highly anticipated results last week. It is a company whose reach stretches across the globe, and its performance could be a good indicator of global economic activity. The finances showed a 66% decline in net profits and earnings per share (EPS) of $0.72. The expectation, however, as reported by Bloomberg, had been a much lower EPS of $0.215.

Perhaps the most important element in Caterpillar's statement was its outlook. The company has boosted its 2009 forecast based on what it sees as evidence that international stimulus plans, particularly in China, are beginning to work. It reckons that the estimated $1.7 trillion being pumped into economies worldwide should be enough to start a recovery. Whether it will be enough to sustain a recovery is another question. Either way, those who had long positions on Caterpillar stock over the earnings releases will be very pleased with their 8% gain in just 24 hours.

The Dow Jones and the FTSE 100 are both up 2% on the week, and nearly 10% over two weeks. The dollar index, which tends to rise when investors are nervous and equities are falling, is down at its early June levels. The VIX Index, which is a measure of the implied volatility of S&P 500 options and is commonly known as the "fear index" is also trading back at pre-financial meltdown levels. Finally, and for those concerned with corporate defaults, the iTraxx Europe index is trading at pre-Lehman Brothers collapse levels.

This index tracks the price of credit default swaps for the top 125 names in the investment grade class in Europe, and is a gauge of the cost of insurance against default. The index is now trading at 100 basis points, more than half the price it was at back in March, implying that the annual cost of insuring against default on high grade credit is now down at 1%. This lower price recognises the fact that considerable cost cutting has taken place across most industries, and also the hope that an economic recovery is not far down the road.

To put that number in perspective, it is worth noting that credit default swaps on Irish sovereign debt are trading at 160 basis points. This means that it costs more to insure against Irish government debt than it does to insure high grade company specific debt. So we have the evidence and the results, and the near-term trend in equities looks set to continue higher.

Oil bullish but showing some signs of weakness

There was a significant rally in oil last week with US light crude breaking $66/bbl during Tuesday's session. While this gain did retrace slightly that night, it was reignited by drawdowns in the crude oil inventory figures on Wednesday.

It is interesting to note that, during this recent crude rally, the contango has been widening – the September contract is getting cheaper in relation to the October contract. With no extraordinary shifts in supply and demand in recent weeks, it would appear that broader economic confidence and the rally in equities is spurring on oil prices.

While the longer-term fundamentals may be bullish, the widening contango is complicating matters, and may suggest an excessive speculation in the market.

Recently we wrote about the importance of learning how to trade ranges. An interesting range has emerged on Royal Bank of Scotland, and it is worth looking at. Its share price has been trading between £0.35 and £0.41 over the past two months, finding support at £0.35 three times, and resistance at £0.41 twice. A range trading strategy in this case is simple to execute: go long at £0.35 and then stop and reverse at £0.41.

The main risk is the market breaking out of the range. If this happens, the range trader will stop out of their position. The more aggressive trader will stop and reverse to take advantage of the breakout.

Paddy Haran and Vinay Sharma, Delta Index