From Market Disaster to Relief in 24 Hours: What Changed and What Hasn't

Thursday's Big Reversal Is Just the First Step in the Journey to a Better Market

Within a 24-hour period, investors went from anticipating economic disaster due to exploding oil prices to anticipating the end of the war and a normalization of energy prices. It is a dramatic shift in both speed and magnitude.

President Trump calmed investors with reassurances that the Iran situation was just a short-term excursion and that many goals have already been achieved. Brent crude is down more than 9% Tuesday morning to around $89.57, giving back a substantial portion of last week's historic surge. S&P 500 futures are up 0.37%, Nasdaq 100 futures are adding 0.48%, and Dow futures are up 0.44%.

Much of the recent market gloom stemmed from fear that the U.S. would be drawn into a prolonged conflict with high economic and military costs. Political opponents have been pushing the narrative that this was similar to past Middle East engagements that turned into years-long commitments. That fear drove the stagflation trade, the bond market disruption, and the relentless selling pressure that characterized last week.

The Trump administration appears to be on a deliberate mission to end this quickly, and the market embraced that message Monday after a series of comments about progress and the achievement of specific goals. Trump told CBS the war was "very complete" and said he was considering taking control of the Strait of Hormuz to keep oil shipping lanes open.

Iranian President Pezeshkian added to the positive tone, signaling Tehran was prepared to reduce tensions, provided neighboring countries are not used as launching points for attacks on Iran. G7 energy ministers are holding talks Tuesday as well, with strategic reserve releases still on the table if needed.

Gold is up nearly 2% Tuesday morning alongside the equity rally. Rising gold while oil falls and stocks advance suggests the market believes the situation is improving but is not yet fully convinced it is resolved. It is cautious optimism rather than an all-clear.

What Changed and What Has Not

The danger is that things will not go as planned. There will likely be setbacks. The fog of war has not fully lifted, and a single news cycle in the other direction could reverse much of Tuesday morning's enthusiasm. Trump also said at a press conference Monday that the military campaign still has further to go, which is likely an understatement.

What has changed very quickly is the market's assessment of the most likely outcome. A week ago the base case was shifting toward a prolonged conflict. Tuesday morning the base case is shifting back toward a shorter engagement with manageable, if not positive, economic ramifications. That is a significant reassessment and it is driving investors to add long exposure in a hurry.

The relief in oil prices does not make the inflation and stagflation concerns disappear. Even if the war ends quickly, the spike in energy costs over the past two weeks has already worked its way into the pipeline. The economic data calendar this week will remind investors of that issue.

The Consumer Price Index for February hits Wednesday morning, with expectations of a 0.3% monthly gain and 2.4% annually. Core CPI, excluding food and energy, is expected at 0.2% monthly and 2.5% annually. Those numbers were set before the oil spike fully registered and the market will be watching closely for any upside surprise.

Friday brings two important reports. The Bureau of Economic Analysis releases January personal income and outlays data, with the Personal Consumption Expenditure index expected to show a 0.3% monthly gain and 2.9% annually. Core PCE is expected at 0.4% monthly and 3.0% annually. The Bureau of Labor Statistics also releases the January Job Openings and Labor Turnover Survey, with economists estimating 6.75 million job openings. A core PCE reading at or above expectations on Friday would revive stagflation concerns quickly regardless of what is happening in the Middle East.

The Technical Picture

Monday's strong intraday reversal counts as day one of a rally attempt. Investors Business Daily is now watching for a follow-through day, which can occur as early as Thursday. A follow-through day requires a significant gain on higher volume than the prior session and would provide the first technical confirmation that a new uptrend is developing rather than just another oversold bounce in a downtrend.

The recent corrective action has been unusual because it has been so shallow for most of the major indexes but hit many individual stocks very hard. It creates pressure for rotational action rather than broad index moves and will keep the focus on individual stock selection.

Five of the last six sessions since Operation Epic Fury was launched have seen the Nasdaq 100 close substantially higher than it opened. That persistent intraday buying is constructive. The follow-through confirmation would be the signal to begin adding exposure more meaningfully.

Game Plan

Be wary of chasing Tuesday morning's gap higher and throwing caution to the wind. Watch how the market handles the early enthusiasm through midday. The stocks and sectors that hold their gains and show genuine accumulation are the ones to watch closely. The reassessment of the energy trade, the potential Fed rate cut story coming back to life as oil retreats, and the relief in beaten-down growth names represent real opportunities if the de-escalation of the Iran situation continues.

A confirmed follow-through day later this week would change the technical picture significantly. The overall approach remains the same. Be patient with entries. A confirmed trend gives you plenty of time to participate. The cost of being a day late to a rally is far lower than the cost of serial bottom-calling mistakes.

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