Your question - Why has the ASX rallied, if oil prices are set to put a brake on corporate profits and economic growth? The answer is the same reason why stock markets have always rallied...Credit growth and the expectation of low interest rates. Credit growth is the primary driver behind any equities market rally, and there are the inevitable corrections which occur where corporate profits catch up...
The reason behind this last month's ASX rally, particularly in the banks, which took many Australian traders by surprise (moi included), was probably spraked by a buying plunge on US bonds which drove yields down. This was the US bond market signalling that interest rates should be heading lower, and there was a widespread belief that the central bank should have no reason to raise rates - they should be lowering them in fact...to help stave off deflation and perhaps the anticipated oil price effect on growth which clearly will not be as inflationary as was predicted.
Contrast this with Alan Greenspan's warning to Congress last month that further US fiscal spending would eventually require a rise in interest rates to accomodate, and there is a big problem or disconnect here!!
Apart from Greenspan's warning, the US signals, as well as the ongoing reluctance of our Reserve bank to raise rates, caused the Australian banks to take off.... combine this with a plunge on the $USD - commodity prices ran initially Aust resources up , and a rise in the $A saw the overseas money has come for our gold miners again etc...all equates to ASX market rally
But at the same time thers seemed to be a sudden clear realisation in Western markets that inflation is just not there - oil prices are now NOT going to have the inflationary impact expected (or hoped for by some)
The reasons for this I believe were discussed earlier - the robust structural competition which has developed in the West over the last 2 decades - meaning a continued lower prices and a lower interest rate environment.
While higher oil prices are a brake on economic growth by, among other things, hurting corporate profits, capital investment, and employment, they are not necessarily inflationary. It is still early days, and there is no doubt that high oil prices WILL translate into some sort of inflationary pressure but it will be minimal in my belief.
Answering your last question - when will the ASX market correct? My guess is this will happen when there is enough of a sniff of an interest rate rise (perceived or real). It's a hard one because in my opinion interest rates don't need to go anywhere fast ... but the market corrected around this time last year when inflation was being touted and ramped and the reserve was starting its small tightening steps. Keep an eye on the American bond market closely for banks in particular... On the $A dollar I have major resistance at 75.4 cents ...if it breaks above this then resources and goldies are probably in for further good times.
By the way I haven't got the sads on for gold, but indeed I am bull... Unlike many I don't see the collapse of fiat money system - nor do I see rampant inflation - rather a readjustment of currencies with the Euro and others strengthening - of course gold in $US terms benefiting from this.
