Last Friday's rally was heartening, but why did it happen? I am guessing that a drop in oil and a rise in the dollar were helpful ingredients. At $115.32, oil is down 22% from its $147.27 a barrel high, and at $1.49, the dollar has strengthened 11% from its low of $1.60 per euro. But what was behind those moves? Can those factors persist? What happens to stocks if they sink?

The dollar/euro is moving based on relative economic strength and inflation policy. Some think that the dollar strengthened over recent weeks because Europe appears to be heading into a recession and the U.S. has already been in one since the fourth quarter of 2007. If the U.S. is further along, it may begin its recovery sooner.

As far as inflation policy, the U.S. has kept rates at 2%, while Europe appears more likely to raise rates to fight inflation. Bloomberg News reports that European Central bank council member Klaus Liebscher said "policy makers remain focused on the 'worrying' level of inflation." The euro has rebounded to $1.50 on this announcement.

Meanwhile, it amazes me that nobody seems to know the real reason that oil prices move up and down. If it was purely supply and demand, the price of oil would not have been so high in July. That's because in May, demand in the U.S. was down 300,000 barrels a day on higher prices while supply remained steady. I think the price was rising because of investors buying oil and shorting the dollar to hedge inflation. (Also, oil tends to rise when the dollar falls because oil is traded in dollars.)

With Congressional investigations into market manipulation, a Netherlands trader was indicted for market manipulation. And SemGroup, an energy trader that controlled 2% of U.S. energy output, took a $2 billion loss and failed. It would not surprise me if these two events were behind the collapse in oil prices and the continuing decline has caused more and more investors to bail out of this buy oil, sell dollars trade as it becomes less profitable.

But Russia's invasion of Georgia changes the dynamics. Bloomberg News reports that traders think the global supply chain for oil could be interrupted. Bloomberg writes that "Georgia is a key link in a U.S.-backed southern energy corridor that connects the Caspian Sea region with world markets, bypassing Russia. The Baku-Tbilisi-Ceyhan pipeline ships Azeri Light crude, which is typically priced based on the Brent contract."

Bloomberg interviewed a senior broker at MF Global Ltd in London who thinks the flow of oil through this pipeline could be interrupted. Bloomberg quotes Rob Laughlin as saying, "The events in Georgia over the weekend place more concerns in traders' minds over the continuity of supply of crude oil. The Baku-Ceyhan outages are placing additional strains on a creaking supply chain."

Stocks could tank if the dollar drops and oil rises. We'll see whether today's fluctuations are a temporary blip or a permanent problem for equity investors.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.