Market Action Deteriorates as Trump Debates Involvement in Middle East War

The market reaction to the Israel-Iran war has been fairly mild since hostilities commenced on Thursday night, but speculation that the U.S. may become an active participant weighed on the market on Tuesday. President Trump is contemplating some form of action, but nothing specific has been announced so far.

The primary market concern is that the U.S. could be dragged into the responsibility of regime change and nation-building, which has been a quagmire in recent years. Afghanistan is a prime example. This situation is quite different, but the market hates uncertainty, and the possibility of an active U.S. role creates a hefty dose of unknowns.

A big part of the problem is the technical condition of the indices. Upside progress has been stalling for a while, and the only thing holding us up has been overly negative bears who are poorly positioned.

Tuesday was one of those days where the underlying action was worse than indicated by the indices. The S&P 500 was only down about 0.75%, but breadth was almost three-to-one negative, and there was a long list of names with sizable drops. Many of these stocks have been struggling recently, but the selling picked up some steam.

On Wednesday, Israel-Iran will continue to be an issue, but attention will turn to the Fed interest rate policy decision. There is unlikely to be any change in policy, but the market will be carefully weighing what Jerome Powell has to say.

It remains a very difficult trading market right now, but the good news is that technical conditions are evolving, and we should see some better setups developing in the near future.

I’m out on Wednesday, and don’t forget that the market is closed on Thursday for the Juneteenth holiday. I will see you on Friday.

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