A Market Trapped in the Fog of War
Energy turmoil, rising rates, and weakening momentum are testing markets as the Strait of Hormuz disruption fuels fresh inflation worries.
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2-20-24-confused
Stocks are under pressure, oil is rebounding, and interest rates are moving higher Thursday morning as the Iran situation continues to fester without resolution. Brent crude is back to $104 after losing more than 2% on Wednesday. The White House insists peace talks are ongoing while Iran is publicly rejecting U.S. overtures and insisting that it will retain control of the Strait of Hormuz.
The Strait Is the Story
The world is growing impatient, and the biggest immediate problem is that oil prices are staying elevated and starting to have significant economic impact on countries dependent on shipments through the Strait of Hormuz. The IEA is calling the current events the largest supply disruption in the history of the global oil market, with flows through Hormuz collapsing from 20 million barrels per day to a trickle and Gulf production cuts of at least 10 million barrels per day. That is pressuring bonds amid rising inflation worries.
Qatar has already declared force majeure on significant gas exports after drone attacks, and it could take at least a month to return to normal production levels. Qatar supplies roughly 20% of global liquefied natural gas, and the longer Hormuz stays closed, the harder it becomes to unwind the damage.
The Market Is Wearing Us Out, Not Scaring Us Out
Recent market action has shown a few pockets of hope, but they are limited. There has been better action in small-caps and more speculative names, but the Magnificent Seven stocks remain a major drag.
While this is not a full-blown bear market, many aspects of it feel like one. Important support at key moving averages is barely holding, and the market has been unable to produce sustained positive momentum or strong closes. The price action is poor, and even when there are breakouts, they tend not to gain traction.
The S&P 500 has established a pattern of lower highs and lower lows from the 7000 resistance level, with both major moving averages now acting as overhead resistance rather than support. Momentum is deteriorating without triggering panic capitulation levels that would create conditions for a snapback rally.
One of the key problems is that traders keep anticipating that President Trump will not withstand the pain. The TACO trade is working, but the bounces are fading faster. It will take time, as problems of this magnitude cannot be resolved overnight.
There has not been any real panic or capitulation, which means lingering worries. Investors are not being scared out of this market. They are giving up out of disgust rather than fear.
The Bull and Bear Cases
What is supporting the market is the hope that the conflict ends, oil prices drop quickly, inflation and growth concerns dissipate, and the Fed takes a more dovish stance. If all those things happened together, the market would move sharply higher.
The bearish scenario is that the war drags on, and the attempts to contain energy simply do not work. That is a stagflation setup, and it is not priced into the market. There is the potential for significantly more downside depending on how long it lasts.
The reality is that we are somewhere in the middle. The situation will not resolve as quickly as the optimists hope, but there will likely be progress toward normalizing oil flows that prevents the disaster scenario the bears are forecasting.
We have some jobs data and additional Fed commentary on the calendar Thursday, but it is unlikely to move the needle much right now. The geopolitical backdrop is overwhelming the economic data for now.
How to Think About It
The best course of action is not to be firmly bullish or firmly bearish, but to accept that we simply do not know what comes next. Focus on the price action and manage your individual positions.
Rather than trying to predict market turns, look for signs of support, improving technical action, and pockets of relative strength. This is a market where defense matters more than offense.
Not losing ground should be the primary objective right now.
Related: The Oversold Rally Marches On. How Far Can it Go?
At the time of publication, Rev Shark had no positions in any securities mentioned.
