The Powerful Ceasefire Rally Has Significant Flaws: What to Do Now

Traders work on the floor of the NYSE

After hitting a low on Monday, March 30, investors have been anxiously anticipating progress on Iran. There were five straight positive closes for the S&P 500, followed by a sudden leap higher on Wednesday when a ceasefire agreement was announced.

The S&P 500 jumped 2.5% and the Nasdaq Composite 2.8%, and both closed at their highest levels since March 11. The action had the key elements of a technical follow-through day and suggests further upside is ahead.

The Flaws in the Picture

If we focus solely on the charts, the pattern is favorable for bulls, but there are significant issues with both the price action and the bullish thesis. One technical issue was that, despite a historically strong gap-up open, stocks did not gain much intraday traction and only about 73% of volume was positive.

The other technical problem is the large unfilled gap on the chart created at the open. It would have been a stronger follow-through if it had occurred primarily on steady intraday strength rather than on gap-and-sit action. That gap will act as a gravitational pull, and any negative news will put it into play.

The News Is Not as Clean as the Headlines

The ceasefire is already showing cracks on Thursday morning. Iran accused the U.S. of violating multiple clauses of the deal framework. It threatened to suspend tanker traffic through the Strait of Hormuz and pull out of the deal entirely over Israel's continued operations in Lebanon. Iran's IRGC hinted that sea mines may still be present. Oil is rebounding toward $97 a barrel as a result.

Before the war, between 100 and 120 commercial vessels used the Strait daily. On the first full day of the ceasefire, only two ships passed through, and both were bulk carriers carrying dry cargo, not oil tankers.

No one seems clear on the actual terms of the agreement or who it covers. Israel says Lebanon is not included. Iran says it is. The Islamabad talks with Vice President Vance, special envoy Steve Witkoff, and Jared Kushner begin Saturday, but there is likely to be deterioration in the situation before then.

There was extremely strong anticipation of positive Iran news built into the market over the last week. A proclamation of victory and a ceasefire agreement made for great headlines, but the reality is that substantial problems remain, and the chances of renewed hostilities are not low.

What to Do Now

A technical follow-through day is positive, but it doesn't mean blindly buying. As I discussed Wednesday, I was a seller into the early strength and raised my cash levels to around 40%. I did this not because I am bearish but because I wanted greater flexibility to buy the best charts as they develop.

It is unlikely that stocks will run away to the upside with this much uncertainty still surrounding Iran and the broader economic situation. Earnings season starts at the end of next week, when banks begin reporting. There will be increased focus on fundamentals and valuations, and some elevated volatility from macro issues before the bulk of earnings reports hit in about three weeks.

I feel good about my positioning, with higher cash levels, and will continue hunting for stocks showing relative strength. I doubt there will be much sustained momentum, but that is not entirely a bad thing. It will help produce better entry points if we have some churning and pullbacks as investors continue to worry about Iran and oil.

It is a peculiar market environment with generally positive technical action but an extremely high risk of negative news flow. Investors have been so anxious to catch a rally that they have been willing to ignore problems such as persistently high oil prices. Eventually, that will matter.

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