2 Recent Patterns Are Driving This Ugly Market Action

Watching the Market

The market was slammed again on Thursday as hopes for a quick deal with Iran evaporated and oil and inflation worries moved back to the front burner. Iran dismissed the U.S. peace proposal, with officials demanding a complete halt to what they called "aggression and assassinations" and also demanding recognition of Iran's sovereignty over the Strait of Hormuz. Surrendering the Strait would give Iran a weapon it could use indefinitely, and Washington will never agree to it.

Brent crude jumped 5% to above $108 a barrel and West Texas Intermediate climbed to above $94, reviving stagflation fears that had been slightly weakening early in the week.

The S&P 500 took a meaningful hit, but it was the Nasdaq 100 (QQQ) and the Magnificent Seven (MAGS) that absorbed the most damage. Meta Platforms (META) was the worst hit in the group, falling nearly 7%, after a U.S. jury found the company liable for harm to young people from its social media platforms and management announced layoffs.

The semiconductor space took its own separate hit after Alphabet (GOOGL) published research on more efficient AI models, raising questions about future memory demand. Lam Research (LRCX) and Applied Materials (AMAT) both fell around 4% on the news. Breadth was poor across the board, with the iShares Russell 2000 ETF (IWM) off 1.6%.

Two patterns are doing most of the work here, and understanding them helps explain why the action has felt so repetitive.

The TACO Trade Is Losing Its Punch

The first is the TACO trade, which I have discussed a few times in recent weeks. The basic idea is that whenever the market and the bond market come under too much pressure, President Trump steps back from his more aggressive positions. It has happened often enough that professional traders now anticipate it, and that anticipation is exactly what is draining it of its power. Trump's comments on Thursday were optimistic, but the market barely flinched.

Thursday and Friday Keep Doing the Damage

The second pattern is a little less obvious but equally worth watching. All of the meaningful losses in the S&P 500 this month have occurred in the Thursday and Friday sessions. The rough math is that Thursday and Friday have produced a combined loss of around 483 points, while Monday through Wednesday have managed a net gain of about 104 points.

The dynamic behind it is that traders are nervous about weekend risk, so they sell into Thursday and Friday to reduce exposure. When the weekend passes without a major escalation, they buy back in on Monday and carry the market higher for a few sessions. Then the cycle repeats.

This pattern has also coincided closely with the TACO trade. Trump's more constructive comments have tended to land early in the week, providing a lift for a day or two. By Thursday, the effect has faded and the selling picks up again.

The inherent problem with any pattern that becomes too well recognized is that traders start trying to front-run each other. Once enough people anticipate the move, the move stops delivering. We are likely somewhere in that process with both of these.

We'll see what Friday brings. If there are no clear positives on the tape, the default setup favors more selling as players look to lighten up before the weekend.

Have a good evening. I'll see you Friday.

At the time of publication, Rev Shark had no positions in any securities mentioned.