Oil's Grip on the Market Tightens as Bonds Flash a Warning

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Markets are under pressure again on Thursday morning as oil prices resume their upward trend. The release of strategic reserves is just a drop in the oil bucket. The International Energy Agency made the situation plain on Thursday, stating that the war is creating the largest supply disruption in the history of the global oil market. This is the most authoritative energy body in the world and the market is taking it seriously.

While equity markets are lower around the world, the more concerning development is in the bond market. Interest rates are rising as bonds sell off and inflation concerns are expanding. That combination deserves vigilance. The longer the oil disruption continues the greater the pressure will be as higher energy prices filter through the system and touch almost everything. Oil is not just a commodity. It is an input to the entire economy and when it costs more, eventually everything costs more.

What is keeping the market from a full technical bear market at this point is the hope that a resolution arrives soon. President Trump continues to offer vague reassurances about finishing the job and making sure Iran can never be a threat again, suggesting it will not take much longer. The market is essentially trading on those comments and the anxiety that surrounds them.

Setup for a Sharp Bounce Remains Intact

Investors are well aware that any genuinely positive news has the potential to produce a powerful and rapid rally. Hedge fund positioning has become heavily defensive and those hedges will come off aggressively the moment there is a credible signal of resolution. The snap-back potential is substantial.

There is a temptation to load up now so you are positioned for that bounce. The problem is that there is no way to know how long current conditions will persist. Many stocks could move much lower from here. Even if the Iran war ended tomorrow, restoring oil supplies to pre-war levels would take months. That means inflation remains a market obstacle well after any ceasefire. Buying aggressively into that uncertainty is a risk that is difficult to justify.

My approach is to respect the weakness rather than fight it. Wait for news to spark genuine positive action and then move quickly and decisively. The preparation for that move is what matters right now, not the move itself. If you have capital then you should view protracted weakness at this point as an opportunity and not a market negative.

What I Am Watching

My plan is straightforward. I am building a list of stocks I want to own, some for fundamental reasons and some because the charts are setting up well. When conditions improve those are the names I will add to. Later today I will discuss a few large-cap technology names I want to use as trading vehicles when we finally get positive and sustainable market action.

On the economic calendar Thursday morning we have weekly jobless claims, which have been running around 213,000 and reflecting a labor market that remains stable despite everything else going on. We also have the January Trade in Goods and Services report from the Bureau of Economic Analysis. Neither release is likely to move markets meaningfully Thursday. The only number that really matters right now is the price of oil and what it means for inflation.

Stocks are set to open lower, but I would not be surprised to see intraday buying interest emerge once again. Investors keep anticipating positive news from Trump and that anticipation alone has been enough to generate late-session recoveries several times recently. Whether it happens again Thursday depends entirely on what comes out of Washington.

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