A Time for Caution

Posted by Cam Hui -

A Trend Model Status Report
My Trend Asset Allocation Model has performed remarkably on an out-of-sample basis by beating the 60/40 benchmark almost every year since inception. It outperformed a 60/40 benchmark while exhibiting 60/40 like risk.
 

 

The Trend Model applies trend-following principles to a variety of global equity markets and commodity prices to arrive at a composite score.
 

What is the model saying now?
 

I downgraded the model reading from bullish to neutral last week. The accompanying chart shows the trends of different major components. The S&P 500 weakened below its 200 dma and it is struggling to regain that level. Non-U.S. equities, as measured by the MSCI All-Country World Index Ex-U.S., did weaken but remains above its 200 dma. Commodity prices are well above their 200 dma, though I would tend to discount the effects of these readings as commodity strength is attributable to a supply shock, and not the global demand-driven strength the Trend Model is designed to mean.
 

 

Here are the bull and bear cases for equities.

 

 

The Bull Case
The internals of the recent recovery in equity strength have been a remarkable exhibition of cyclical strength. Cyclical stocks, which were on a tear in early 2026, resumed their leadership despite oil shock and supply chain concerns.

 

 

The economically sensitive small-cap Russell 2000 tested its 200 dma support, which held, and its relative performance turned up in a synchronized fashion with cyclical stocks.

 

My equity and credit market risk appetite indicators turned up before the stock market rally and formed positive divergences. I interpret this as a constructive bullish sign for equity strength.
 

 

Remember all the concerns about cracks in private credit? The relative price performance of junk bonds and leveraged loans are recovering, and even the price-troubled lender Blue Owl Capital is stabilizing.

 

 

The stabilization in credit is leading to a bounce back in financial stocks on a relative basis. Relative breadth indicators (bottom two panels) bottomed out in late February and have been improving ever since.
 

These are all bullish signs of a healing market.

 

From a tactical perspective, I reiterate my outline to a possible bullish pivot from yesterday’s publication. First, Ozan Tarman, vice chair of global macro at Deutsche Bank, revealed in a Bloomberg podcast that in speaking to global macro hedge funds, he concluded that the pain trade is a squeeze higher, though the left-tail of the return distribution is quite fat.

 

Here is my upside squeeze scenario:  Both Vice-President Vance and Israeli sources have said somewhat the same thing recently. The coalition has achieved the majority of its objectives. In other words, they are running out of targets to bomb, and they are reaching the point of diminishing returns with further bombing. In military terms, that’s called culmination.

 

 

A Geopolitics Decanted podcast with retired Rear Admiral Mark Montgomery, who was the Director of Operations at the U.S. Navy’s Pacific Command, tells the story of the next phase of the campaign. Use A-10 and Apache helicopters to degrade the coastal defenses, followed by the initiation of escorts of tankers and other cargo ships through the Strait of Hormuz.

 

The U.S. and Israeli military have shown strong tactical and operational competence in carrying out this campaign. The question that overhangs the war is the strategic direction of the war. Montgomery laid out the steps that the U.S. Navy would undertake to escort convoys through the SoH.

 

A White House announcement that the U.S. is preparing to escort convoys through the Strait would spark a rip-your-face-off bullish stampede and change the market narrative of the war.
The risk is an overreach to land ground troops, either to seize one or more islands, or part of the Iranian mainland. The WSJ reported that the Iranian-backed Iraqi militia has adopted Russian drone tactics to which American forces have little or no defense, which could render a ground invasion a military disaster right up there with the Battle of Kesserine Pass and the Charge of the Light Brigade.

 

The Bear Case
While the stock market is signaling a bullish recovery, the Treasury market is signaling caution. The yield curve is flattening, which is a sign that bond investors expect slower economic growth.
 

 

The Citigroup U.S. Economic Surprise Index, which measures whether economic indicators are beating or missing expectations, is rolling over, indicating slower growth expectations.
 

 

At the same time, the 10-year Treasury yield has risen, driven mainly by an increase in term premium, indicating market concerns about the future fiscal response.
 

 

As a consequence of the uncertainty of the inflationary effects of an oil spike, the market is now discounting no rate cuts by the Federal Reserve until late 2027.
 

 

 

No Time for Heroes
In summary, global stock prices have weakened, and the S&P 500 has suffered some technical damage by violating its 200 dma. Stock market internals point to a bullish outcome led by small-cap and cyclical leadership. The bond market begs to differ as it is signaling slower growth and possible stagflation ahead. I interpret these conditions as a time to be cautious in asset allocation, which is why I downgraded my Trend Model from bullish to neutral, indicating investors should rebalance their portfolios to their target stock-bond benchmark weights. This is not a time to be a hero.

 

If I was to engage in Fedspeak, the tidk balance is risks is evenly distributed. The last time the world saw a prolonged oil spike was in February 2020 when Russia invaded Ukraine. The S&P 500 violated its 200 dma shortly before the invasion, and proceeded to weaken further until Q4 2022. On the other hand, current equity market internals point to a cyclical rebound.

 

Which view will ultimately be correct? I don’t know. That’s why the Trend Model is neutral.

 

In light of the elevated level of macro risk and uncertain technical backdrop, I am advising investors to reduce risk to a neutral level in their portfolios.

 

 

Goodbye and Good Luck
This concludes the final publication of Humble Student of the Markets. I will continue to write at Fred Meissner’s site on a monthly basis. You can subscribe at a discount rate using the code “CamTrial”. In the meantime, I plan on engaging in father-daughter bonding over video games like Baldur’s Gate 3

 

 

…and Crusader Kings 3.

 

 

My best of luck in your future investing endeavours.

 

Some Final Words on the Market Outlook

Posted by Cam Hui -
This is my last strategy publication before my retirement at the end of March and I would like to conclude with some final words on the intermediate-term outlook for stocks. (I will be publishing a final technical analysis review tomorrow).

 

Let’s begin with the good news. My long-term timing model is still bullish on the U.S. stock market. As a reminder, this model flashes a buy signal whenever the monthly MACD of the broadly based NYSE Composite (bottom panel).
 

 

Ozan Tarman, vice chair of global macro at Deutsche Bank, revealed in a Bloomberg podcast that in speaking to global macro hedge funds, he concluded that the pain trade is a squeeze higher, though the left-tail of the return distribution is quite fat.
 

 

A Gulf War III Scenario
No analysis of the intermediate-term market outlook is complete without a discussion of the resolution of Gulf War III. I listened to a lot of podcasts so that you don’t have to. Here is some of the more important points from a number of different podcasts.

 

A Bloomberg podcast with Rory Johnston outlines the stakes. On a normal pre-war day, about 20 million barrels of oil transit the Strait of Hormuz (SoH), representing about 20% oof global demand. At the height of the COVID pandemic, global oil demand fell by 20%. In other words, a full closure of the SoH forces the global economy into a demand shrinkage equivalent to the height of the COVID shock. Johnston reckoned that oil prices need to rise to over $200 in order for such a scenario to transpire.

 

That said, there are some ways to mitigate the loss of SoH flows. Iran is still producing two million barrels a day that is transiting the Strait. Saudi Arabia has an east-west pipeline that bypasses the Strait, and the UAE has a pipeline that ends just outside of the Strait. According to the accompanying chart produced by Johnston, this still leaves a shortfall of 13 million barrels. Some of the shortfall can be mitigated by buffers, such as the oil that’s already on the water and the release of strategic petroleum reserves, which amounts to about three million barrels a day. The global markets and economy will need to address the remaining shortfall by adjusting prices.

 

 

In reality, Johnston’s flow estimates slightly overestimate the shortfall. The Saudi East-West pipeline capacity is five million barrels, which he penciled as four in his chart. Reports of recent throughput have been as much as seven, but it’s an open question whether these flow rates are sustainable. As well, Iran has been allowing a limited number of tankers with loads not connected with the U.S. and Israel to pass – for a fee. These additional mitigation measures potentially half Johnston’s daily shortfall of 6.17 barrels a day.

 

A separate Geopolitics Decanted podcast with retired Rear Admiral Mark Montgomery, who was the Director of Operations at the U.S. Navy’s Pacific Command. Montgomery served with Admiral Brad Cooper, the current head of CENTCOM, and knows Cooper well.

 

From a tactical perspective, tankers transiting the SoH face a multitude of threats, such as speedboats, anti-ship cruise missiles, missiles, drones and mines. The U.S. is deploying patrols of A-10 attack aircraft and helicopters to hunt down potential threats. Montgomery postulates a campaign to degrade these threats. The threat will never be fully eliminated, but reduced to an acceptable minimal level so that the U.S. Navy can conduct convoys. Montgomery estimates they are at least a week away from that point, when the Navy can pivot from attack to stabilization.

 

Montgomery went on to detail how a convoy might work. Deploy two or three Aegis-class destroyers, which have an array of radar systems to detect possible threats, to screen the convoy of ships transiting the SoH. Typically, a destroyer might have about a 60-second reaction time to detect and shoot down incoming missiles and drones. That’s why the initial degradation phase is important. The destroyers and aircraft can deal with one or two missiles, but would be overwhelmed by a swarm of 6–10 missiles. The current phase of degradation is designed to minimize the launch threat to an acceptably low level.

 

Based on what Montgomery said, the U.S. could transition in early or mid-April from a bombing to a stabilization phase of the campaign. It would deploy destroyers for convoy escort duty. If we use Montgomery’s timeline as my base-case scenario, Trump could realistically declare “victory” by early April and announce a naval escort program for tankers and other cargo ships.

 

Addressing the issue of strategic goals, Montgomery reframed the U.S. strategy as not so much regime change, but to handcuff the Iranian regime’s ability to threaten its Gulf neighbours, Israel, and the U.S. by degrading its ballistic missile program and defensive industrial capability, sink its navy, and constrain its nuclear development program. Those goals have mainly been met. He estimates the Iranian missile program has been set back five years, navy about seven years, air defense three to five years, and drone program only a year. The nuclear program is the most difficult to measure. It creates sufficient breathing room for Iran’s neighbours to create a framework to contain Iranian ambitions.

 

In addition, the Trump-Xi summit has been rescheduled for May 14–15, which is an indication that the White House expects combat stabilization by mid-May. While all this may sound like good news for the markets, the costs of the war would start to appear in the global economy. The closure of the SoH didn’t just cut off oil, but triggered a global supply shock with “disruption [that] extends well beyond energy, cascading through chemicals and fertilizers into food systems, with the most severe consequences falling on developing economies”, according to the Kiel Institute.

 

As an example, the last load of LNG that left the Gulf should be arriving in Asia during the last week of March. The full effect of the supply shock will start to be felt in Asia in April, and the shock wave will traverse to Europe and the Americas.
The Kiel Institute modeled the wide ranging effects of this supply chain disruption:

The consequences extend far beyond the energy sector. Energy prices rise most sharply — but the critical finding is how these increases propagate: natural gas is the primary feedstock for nitrogen fertilizers, and Gulf chemical exports underpin agricultural supply chains worldwide. When energy supply is disrupted, the effects cascade through chemical production into agriculture. Global energy prices rise by +5.4%, but food prices follow at +2.9% — well beyond what standard trade models would predict.

 

 

The key question for investors is whether the market will welcome the announcement of an end to major hostilities or become rattled at the economic effects of a supply chain shock that’s already been set into motion but may not be fully discounted. An article in the Economist outlined the difficulties of restarting oil and gas production and concluded that “Even if Donald Trump and Iran reached a deal to stop fighting tomorrow, it would thus be another four months before markets regained some semblance of normality.”
 

Tactically, the stock market’s recent recovery is an indication it is being led by cyclical industries. This is an indication that it’s prepared to look through the valley of a multi-month slowdown and supply chain difficulty.
 

 

Can the cyclical leadership continue? Risk-on or risk-off?
 

 

The Bullish View
A YouTube interview of Robin Brooks by Paul Krugman produced a more sanguine view of the effects of the war.

 

Brooks believes that calls for Brent oil to rise to $150 and beyond are unrealistic for two reasons. Brooks cited a back-of-the-envelope calculation from the Russian invasion of Ukraine in 2022. Russia exports about seven million barrels of day of oil production, and it was initially feared that those barrels would be sanctioned, and oil prices rose about 20% in reaction. By contrast, 20 million barrels pass through the SoH, so the ratio of Russian oil to SoH oil is about three. Brent crude rose about 60% at its peak in reaction to the latest conflict, which is also a 3-to-1 ratio to the 2022 Brent price surge. To be sure, there is a disparity between the pricing of crude from the Gulf compared to Brent, which is an Atlantic-based benchmark. Nevertheless, Brooks concluded by that metric the market has fully priced in the potential disruption from Gulf War III.

 

Brooks also projected the price of oil based on oil demand elasticity. For non-economists, demand elasticity measures how much the oil price needs to rise if output were to decline by
-1%. The figure is low in the short run because it’s difficult to reduce energy demand, but elasticity is notoriously difficult to estimate. If you use a demand elasticity of 0.15, which is in the middle of the range, you get an oil price of 60–70%, which is roughly in the ballpark of the current price surge episode. The price projections of $200 and beyond from the likes of Rory Johnston would require a much lower elasticity estimate.
 

 

That’s the good news on oil prices. Fears of an energy-driven Apocalypse are overdone.
Brooks went on to outline the evolution of the market during the 2022 Russian invasion of Ukraine. The initial reaction was a rush into USD assets. When the war drums began to beat in early February, the USD rose and Treasuries began to outperform foreign-developed market sovereign bonds on a duration-equivalent basis. When the shooting began, non-U.S. stocks skidded against the S&P 500, though relative performance has stabilized since.
 

 

That’s where we stand today. The next step is the outperformance of commodity exporting countries like Brazil. Regardless of how the war is resolved, the key lesson that the world will have learned is the fragility of supply chains, much like the lessons of the COVID pandemic. Every commodity will be re-evaluated as a “critical mineral or molecule”. Strategic reserves will be established. Watch for capital expenditure stampedes in the sector.
 

 

Portfolio Positioning
I have shown the accompanying chart of the upside breakouts of the gold to S&P 500 ratio and the gold to 60/40 portfolio ratio in the past. The breakouts are the signs of a hard asset cycle. A 60/40 allocation will lag under such conditions and investors should consider a greater allocation to commodities or commodity-sensitive equities in lieu of their bond allocation, such as 60 stocks/20 bonds/20 commodities.
Tactically, precious metals are extended and are undergoing a period of correction and consolidation. Investors should take advantage of this opportunity to deploy more funds into inflation hedge vehicles.
 

 

As for the equity portion of the portfolio, we continue to believe in the barbell approach of allocating to U.S. large-cap growth and non-U.S. value stocks.
 

 

While doubts have begun to arise about Magnificent Seven leadership and U.S. large-cap growth has lagged the market recently, U.S. technology insiders are still buying their own shares into weakness.
 

 

 

Key Risk
To be sure, my portfolio positioning is based on a relatively orderly wind-up of the war. The key risk to my forecast is a disorderly escalation that raises the risk of more supply chain disruptions and a global recession. Conceivably, the U.S. could insert a significant contingent of ground troops, but the operation doesn’t go as hoped, and we see greater force commitment and mission creep. The WSJ reported that the Iranian-backed Iraqi militia has adopted Russian drone tactics to which American forces have little or no defense, which could render a ground invasion a military disaster. Iran could retaliate by attacking Gulf energy production and export infrastructure. Worse still, Iran could attack the Gulf’s desalination capacity. Iran has minimal exposure to desalination for its water, Gulf country dependency ranges from 40% to 90%.
 

 

In conclusion, my base-case outlook for equities is bullish, based on my base-case scenario of an orderly wind-up of the war. Long-term investors should focus on a barbell portfolio of U.S. large-cap growth and non-U.S. value for the equity portion of their portfolio, and make a greater allocation to commodities in the normal bond part of the portfolio. The key risk is the Gulf conflict spirals out of control and raises the risk of a global recession.

 

A ZBT Buy Signal Retirement Gift?

Posted by Cam Hui -
Mid-week market update: The stock market’s weakness last Friday moved the Zweig Breadth Thrust Indicator back to oversold and reset the count for a ZBT buy signal. Monday’s strong recovery was day 1, and we’ve seen three consecutive days of strong breadth. Have the market gods decided to give me a ZBT buy signal as a retirement present?

 

 

Let’s wait and see.

 

 

Constructive Breadth
I am certainly seeing constructive signs of recovery. An analysis of the major market averages shows that smaller stocks, which dominate breadth indicators, as the leadership. The equal-weighted S&P 500 and the Russell 2000 have rallied above their falling trend lines. On the other hand, the NASDAQ 100 has not and it’s dragging down the S&P 500.

 

 

One surprising aspect of the rebound is the strength of the cyclical leadership. Cycical industry relative performance are all in various stages of relative rebounds. The market is in effect looking through the valley of any potential slowdown from the war.

 

 

Both equity and credit market risk appetite indicators are also turning up and exhibiting psotive divergences, which is another bullish sign.

 

 

By pointing out all of these signs of improvement, I expect that I am jinxing the prospect of a ZBT buy signal. Undoubtedly much will depend on the progress of the war and negotiations.

 

I am hopeful, but one tweet can instantly change the tone of the market.

 

A V- or W-Shaped Rebound?

Posted by Cam Hui -
Preface: Explaining our market timing models

We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

 

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). As this site is shutting down on March 31, 2026, my inner trader is retiring so that there will be no tradings outstanding at the end of the quarter. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 to 16-Jan-2026 is shown below, and the chart will no longer be updated.

 

 

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)
  • Trend Model signal: Neutral (Last changed from “bullish” on 20-Mar-2026)

 

 

Poised for a Relief Rally 
The tape of the S&P 500 looks dire. The index decisively breached its 200 dma and violated a support zone defined by its Q4 2025 lows. In the short run, it’s experiencing a series of positive divergences in the VIX and VVIX, which formed lower highs as the S&P 500 reached a lower low.
 

 

The market is poised for a short-term rebound, which President Trump may have triggered when he wrote late Friday on Truth Social, “We are getting very close to meeting our objectives as we consider winding down our great Military efforts…” The thinly traded Dow CFD contract is rising strongly, will investors see a V- or W-shaped bounce?
 

 

An Oversold Market
Here is the short-term case for an oversold rebound.

 

Three of the five components of my Bottom Spotting Model recently flashed buy signals. The VIX Index spiked above its upper Bollinger Band, indicating an oversold condition. The NYSE McClellan Oscillator (NYMO) fell to an oversold extreme. As well, the term structure of the VIX Index inverted, which is a signal of fear in the option market. Moreover, the intermediate term overbought/oversold indicator is within a hair of an oversold condition (bottom panel). Historically, two or more simultaneous buy signals have been sufficient to indicate a short-term bottom.
 

 

The NAAIM Exposure Index, which measures the sentiment of RIAs who manage individual investor funds, fell below the lower 26-week Bollinger Band. Based on the entire history of this index going back to 2006, such conditions have always signaled a tradable rebound.
 

 

I observed last week that  the Zweig Breadth Thrust Indicator had become oversold. Pink vertical lines on the chart mark oversold conditions, and dotted blue lines are the ZBT buy signals. The market weakness late last week plunged the ZBT Indicator back into oversold territory again.
 

 

 

Panicked Enough?
On the other hand, a number of technical analysts have raised doubts about the longevity of any potential rebound. While bearish sentiment is elevated, they may not be panicked enough for a durable bottom, which opens the door to a W-shaped rebound in the near future.

 

The accompanying chart shows the 10 dma of the CBOE put/call ratio. While readings are elevated, they are nowhere near the panicked levels exhibited at the bottom of the “Liberation Day” panic.
 

 

The accompanying chart shows the percentage of bears from the Investors Intelligence Survey, courtesy of Fred Meissner. Meissner likes to look for spikes in bearish sentiment instead of the usual bull-bear spread because newsletter writers tend to have a natural bullish bias. Surges in bearish sentiment is what makes him sit up and take notice.

 

As the chart shows, the 10 week MA of bears is still very depressed and nowhere near the “Liberation Day” bottom, which I use as a benchmark. That said, the weekly reading of 24.1% bears is elevated, though it is not the panicked levels seen at past major bottoms.
 

 

Similarly, the level of portfolio risk taken by the respondents of the latest BAML Global Fund Manager Survey are in retreat, but sentiment is not extreme enough compared to past major bottoms.
 

 

From a longer-term perspective, the monthly AAII investor allocation survey, which asks members what they’re doing with their portfolio instead of their opinion, shows historically low cash levels, which is consistent with major market tops.
 

 

One key metric that stands out is the behaviour of corporate insiders. This group of smart investors have tended to step up and buy their own stock during periods of extreme market stress. While insider buying has risen, so has selling, indicating few signs of strong confidence. I would prefer to see the convergence in the levels of insider buying and selling as it did last April as a bullish signal.
 

 

 

Channelling Jay Powell
On top of that, I am seeing a developing stampede of strategists cutting their year-end S&P 500 targets and economists raising their recession odds, especially if Gulf War III were to continue. The post by Moody’s chief economist Mark Zandi is just one example of many.
 

 

On the other hand, a historical analysis from Deutsche Bank shows that the S&P 500 is within the geopolitical risk bottom window even as Gulf War III intensifies. On the other hand, the “consider winding down” Trump social media post may mark a turning point in market psychology.
 

 

There is much geopolitical uncertainty in the market. I am consequently channeling Fed Chair Jay Powell’s reply when he was asked about the effects of the energy spike on the economy and monetary policy, “I really want to emphasize that nobody knows. The economics effect could be bigger, they could be smaller, they could be much smaller or much bigger. We just don’t know.”

 

In light of the trend reversal, I am downgrading the reading on my Trend Asset Allocation Model from bullish to neutral. The Trend Model is based on a composite of signals from trend-following models as applied to global equity markets and commodity prices. Equity market trends were designed to measure the strength of different and important global economies, and commodity prices were designed to measured real-time market signals of global industrial demand, especially from China. I recognize that the latest episode of commodity price strength is reflective of a supply shock, and not the demand that it’s designed to measure.The downgrade in the Trend Asset Allocation Model is mainly attributable to the weakness in global equity markets. This model went risk-on last July, and equities have performed well since then. It’s time to take some chips off the table and re-balance portfolios to a more risk-neutral position. It is emphatically not a sell everything sell signal. Investors should take the opportunity to lighten up equity positions should the anticipated rebound materializes.
 

 

In conclusion, the equity market is sufficiently oversold that it is poised for a reflex rally which President Trump may have triggered when he wrote late Friday on Truth Social, “We are getting very close to meeting our objectives as we consider winding down our great Military efforts…”. The jury is still out on whether the anticipation rebound will be V- or W-shaped. In light of the elevated level of macro risk and uncertain technical backdrop, I am advising investors to reduce risk to a neutral level in their portfolios.

 

Explaining the Resilient S&P 500

Posted by Cam Hui -
Why is the S&P 500 so resilient? Brent oil prices have breached the $100 level, but the index has only fallen about -7% on a peak-to-trough basis. The apparent divergence has led to a number of Street economists and strategists to call for a deeper pullback based on rising recession risk.

 

From a top-down macro perspective, here are some key differences between the current surge in oil prices and past stock market behaviour based on commonly cited recent oil spike episodes. Most recently, the 12-Day War saw a brief spike in oil price, but the 52-week rate of change was negative, and the S&P 500 shrugged it off. When Russia invaded Ukraine in February 2022, the 52-week rate of change in oil prices was already elevated. In fact, the real surge in oil occurred about a year prior to the invasion. The S&P 500 was already tracing out a top prior to the onset of the war by breaching its 40-week MA before the invasion. By contrast, the S&P 500 only began a test of its 40 dma last week, three weeks after the onset of hostilities.
 

 

While I have some sympathy for the calls of equity market weakness and rising recession risk, here are some other reasons why the S&P 500 has been so resilient.
 

 

An Internal Rotation
The main reason for the relative resilience of the S&P 500 is the continued bifurcated nature of the market and a “lucky” diversification of the S&P 500 portfolio into strong stocks.

 

Remember how I highlighted the appearance of the Hindenburg Omen and the NYSE High-Low Logic Index in February? Elevated High-Low Logic Index readings are indications of a split market, and these conditions have often led to pullbacks.

 

Prior to the onset of Gulf War III, market leadership was dominated by cyclical stocks (red dotted line) while megcap growth lagged. The war sparked a rapid rotation away from cyclicals back to growth.
 

 

This matters because non-energy cyclicals made up only about 10% of S&P 500 index weight. Sure, they fell as investors abandoned the cyclical growth theme, but large-cap growth, consisting of technology, communication services, and Amazon and Tesla in the consumer discretionary sector makes up about half of S&P 500 index weight.
 

 

The war also set off a stampede for U.S. assets for their safe-haven status. Asia, followed by Europe, is more sensitive to higher energy prices, while the U.S. is a net energy exporter. The Sell America trade quickly turned into Buy America. To be sure, the USD had already bottomed in late January and started to rise in February, and Treasuries outperformed non-U.S. developed market sovereign bonds in the same time frame. The most dramatic effect of the U.S.-Israel attack on Iran was the sudden reversal in relative performance of non-U.S. to U.S. stocks (bottom panel).
 

 

Simply put, the S&P 500 was resilient because equity market weakness was evident elsewhere. Cyclicals lagged, but they were only a small weight in the index. Equity weakness was also evident in non-U.S. markets, but their returns are not part of the S&P 500. In the meantime, U.S. large-cap growth regained its leadership status as relative breadth indicators improved (bottom two panels).
 

 

 

The Market Outlook
Having explained the reasoning behind the relative resilience of the S&P 500, what’s the prognosis?
It’s all about the earnings outlook. Strategists have highlighted the remarkable improvement in earnings estimates despite three weeks of oil shock.
 

 

An analysis of earnings growth dynamics shows that much of the improvement in expected earnings growth comes from the technology sector. Other sectors showing positive expected EPS growth improvement are materials from the mining industry because of higher commodity prices, and utilities, which is mainly attributable to increased data centre electrical demand.
 

 

I believe top-down analysts who focus on the evolution of bottom-up earnings estimates during a macro shock are looking at a lagging indicator. Top-down strategists have models that can forecast the effects of a macro shock, but bottom-up company analysts tend to be unwilling to adjust their estimates until they see some clarity on the economic environment. Imagine that you are a company analyst covering an economically sensitive industry like restaurants. What do you say if a client asks about the earnings effects of a $100 oil price?

 

In the words of Fed Chair Jerome Powell at the latest post-FOMC press conference, “We just don’t know”. When questioned about the effects of the war, Powell responded, “The implications of events in the Middle East for the U.S. economy are uncertain. In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy.”

 

Much depends on the duration of the war. Supply chain effects are already set into motion. It isn’t just oil, but natural gas, aluminum, urea and fertilizers, refineries, copper, and a host of other commodities that are affected by the Iranian blockade of the Strait of Hormuz. Once production is curtailed, it takes weeks to months to restart and normalize output, depending on the nature of the plant. Already, QatarEnergy declared that it may have to declare force majeure on long-term LNG contracts for up to five years. An extended Middle East war sparks a series of 2022-style earnings downgrades in 2026.

 

The U.S. faces a number of key calendar deadlines in the coming days that are not negotiable for its economy. By mid-April, corn and soybean plantings need to be in the ground, and higher fertilizer prices will reduce the level of plantings and leave the U.S. with a shortfall for the year.

 

The USDA will publish its prospective planting report on March 31 that measures farmer intentions. The report is a key reference document for the market to estimate global food supply for the year. The FAO Food Price Index will be published on April 3, which incorporates the post Strait of Hormuz blockage effects, and will be a key indicator for the UN whether to declare a global food emergency.

 

Equally important is the reduced level of methanol production and inventory in India, which is feedstock for generic pharmaceuticals produced in India. If the war continues, inventories could be depleted by late May, which restricts the production of key drugs like paracetamol, ibuprofen, metformin and antibiotics. For a perspective on the supply chain difficulties in fertilizer, India formally asked China for emergency supplies of urea on March 12 in order to maintain its fertilizer production. China responded on March 16 with a ban on fertilizer and phosphate exports on March 16, four days later.

 

These key deadlines underscore the knock-on effects of supply chain bottlenecks of the war and the Strait of Hormuz blockade. Economic effects are going to become very real in the coming weeks. While individual deadlines matter, the more worrisome effect of cumulative and overlapping shocks to the energy, food and pharmaceutical supply chains could dent economic growth.

 

In conclusion, I explain the remarkable resilience of the S&P 500 in the face of an oil shock by index composition. Cyclical stocks within the index have skidded, but they only comprise about 10% of index weight, while large-cap growth with about 50% have taken the leadership mantle. The S&P 500 also benefited from rotation from non-U.S. to U.S. stocks for their safe-haven status.
Longer term, much depends on the duration of the war. Supply chain effects are already set into motion. It isn’t just oil, but natural gas, aluminum, urea and fertilizers, refineries, copper, and a host of other commodities that are affected by the Iranian blockade of the Strait of Hormuz. Once production is curtailed, it takes weeks to months to restart and normalize output, depending on the nature of the plant. An extended Middle East war sparks a series of 2022-style earnings downgrades in 2026, which would pose a headwind for the stock market.

 

Que Sera Sera

Posted by Cam Hui -
Mid-week market update: The words of the day seem to be patience and uncertainty. As the old Doris Day song goes, “Que Sera Sera”. No one knows what will happen.

 

I’ve been monitoring the progress of major averages. Both the S&P 500 and the NASDAQ 100 staged brief breakdowns of support, though the NASDAQ 100 recovered. Most averages remain in their wedge patterns. One hopeful signs is the ability of non-U.S. markets to rally through their falling trend line, with the caveat that the sign of strength may be a fakeout much like the S&P 500 and the NASDAQ 100 late last week.

 

 

Much depends on the length of the war.

 

 

Fed Uncertainty
The stock market began the day with a risk-off reaction to the hotter than expected PPI report. That said, the FOMC decision and Powell’s subsequent comments were mildly dovish. Rate projectsions were surprisingly unchanged, though the level of confidence on that forecast was low. One surprise is the upward revision in real GDP growth, which Powell attributed to better productivity.

 

 

I was also surprised at the language of the rate guidance. While Fed officials acknowledged that both inflation and employment risks were elevated, they refrained from signaling that there is a possibility of a rate hike in the near future, which would have really rattled markets. That’s the reason why I chracterized the FOMC decision mildly dovish. I could see that Powell tried very hard not to give any guidance on the future of rate policy, because they simply don’t know the effects of the oil supply shock.

 

 

Sentiment Uncertainty
There is also uncertainty about how to interpret the current sentiment backdrop. On one hand, I had highlighted on the weekend the level of panic shown by the NAAIM Exposure Index sentiment survey. Historically, readings below the bottom band of the 26-week Bollinger Band were extremely accurate tactical buy signals.

 

 

In addition, I also observed on the weekend that the Zweig Breadth Thrust Indicator had become oversold and the market is due for a relief rally (chart not shown). The 10-day window to ZBT buy signal began on Monday, but I am not holding my breath for such a rare bullish outcome.

 

On the other hand, my former colleague Fred Meissner and other technical analysts pointed out that other sentiment indicators, such as the put/call ratio, were elevated but they weren’t at panic levels. These readings open the door to another major downleg in equity prices before the decline is over.

 

 

Similarly, the latest BAML Global Fund Manager Survey shows a pattern of

 

 

 

The Animal Spirits Are Back
If I strictly put my chartist’s hat on, I am leaning slightly bullish, but it’s a low conviction call. In addition to the stabilization of non-U.S. stocks, I am seeing signs that the animal spirits have returned to the market. This is not the sort of thing that happens when investors are worried about a oil-driven recession.

 

Consider, for example, that IPO stocks are outperforming the market.

 

 

The relative performance of speculative growth stocks, as measured by the ARK Innovation ETF (ARKK), and Bitcoin prices are also recovering.

 

 

In the end, much depends on the length of the war and its aftermath. President Trump floated a trial balloon today about declaring victory and abandoning the Strait of Hormuz in light of the lack of support he received from allies. On the other hand, the White House announced several days ago that it was sending two marine units to the Gulf, and they would be unlikely to arrive for two weeks.

 

 

War or peace? A V or W-shaped recovery? Que sera sera.
 

TARP, 2026 Style

Posted by Cam Hui -
I have a constructive outside-the-box modest proposal, in light of all the recent hand wringing about how to open the Strait of Hormuz, the recent Economist cover, and the latest 60 Minutes story about the difficulties that the U.S. faces in opening the Strait.

 

 

Is it time for a TARP-style government financial engineering, 2026 style?

 

 

TARP, With a Difference
Here is the problem as I see it. A lot of oil tankers are trapped in the Gulf and afraid to transit the Strait of Hormuz. President Trump, in frustration, called for tanker captains and crews “to show some guts”.

 

If that’s the problem, why doesn’t the U.S. Treasury take the risk? There is an enormous supply-demand imbalance in the physical commodity inside the Gulf. Supposing the U.S. Treasury announces a bid to buy the tanker and oil in the Gulf inside the Strait at (say) $70 a barrel. It simultaneously announces an offer to sell the tanker and its cargo for deliver outside the Strait at the world price.

 

Surely the U.S. Navy or Merchant Marines have enough staff to take over the tanker and sail it the short distance. The U.S. military should have sufficient resources to escort and suppress fire along the shore during those transits. Sure, there will be losses, but that accounts for the premium between inside and outside the Strait. The notion might appeal to Trump’s profit motive.

 

The proposal is reminiscent of the George C. Scott line in this clip of Dr. Strangelove, “Mr. President, I’m not saying we don’t get our hair mussed, but…”

 

 

Important Questions for Both Bulls and Bears

Posted by Cam Hui -
Preface: Explaining our market timing models

We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

 

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). As this site is shutting down on March 31, 2026, my inner trader is retiring so that there will be no tradings outstanding at the end of the quarter. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 to 16-Jan-2026 is shown below, and the chart will no longer be updated.

 

 

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)
  • Trend Model signal: Bullish (Last changed from “bearish” on 27-Jun-2025)

 

 

The Fog of War
As the stock market struggles with the daily fog of war headlines, it has arrived at a key crossroad. The accompanying chart shows the evolution of different major U.S. equity averages. I have some questions for both bulls and bears.

 

The obvious questions are whether the indices can hold support (solid lines) or rally above the falling trend lines (dotted lines). The first shot across the bow of the bulls are the S&P 500 and NASDAQ 100 violations of short-term support, depicted by arrows, but the break has not been fully confirmed by the other averages and last Monday’s panic outside day reversals are mostly holding (red rectangles). More importantly, how market internals evolve in the coming days and weeks will determine whether the bulls or bears have control of the tape.
 

 

 

The Bears’ Challenge
Here are some difficult questions for the bears.

 

First, sentiment readings are already at a crowded short. How far down can stocks fall from here?
 

 

As well, investors are stampeding for downside protection. S&P 500 put positioning is at an off-the-charts level. Readings are more extreme than the COVID Crash and the “Liberation Day” panic lows, just to name a few major market downdrafts.
 

 

The NAAIM Exposure Index fell below the lower 26-week Bollinger band. This is one of the high probability tactical buy signals that I identified in the past (see High Conviction Idea: My Most Reliable Timing Models).
 

 

An embarrassing development for the bears is the relative performance of defensive sectors. To be sure, defensive sectors made rounded saucer bottoms in relative returns, which signaled technical deterioration, but why did three of the four sectors weaken on a relative basis when the market fell on war jitters (red arrows)?
 

 

 

The Bulls’ Challenge
The bulls have their own challenges as well. To be sure, the stock market is very oversold and sentiment readings are extreme, which sets stock prices up for a relief rally. But can the bulls sustain the advance after initial relief rally?

 

I turned bullish in January when it became evident that the Trump Derangement Syndrome (TDS) had become overdone (see A Time to Reap). The combination of fiscal stimulus and pro-cyclical elements of the OBBB Act and reduced policy uncertainty were going to drive a cyclical rebound. Since then, cyclical industry relative performance rose. With the onset of the war, cyclical relative performance has turned down except for oil and gas and semiconductors. If and when stock prices bounce, what happens to cyclical leadership? What narrative will lead the market upwards if the bulls take control of the tape?
 

 

Non-U.S. stocks were the leadership before the war. The U.S. market became a safe haven, largely because its economy was more insulated from energy shocks. What happens after any rebound? Can investors expect a renewal of non-U.S. leadership or will it revert to a narrow leadership of U.S. large-cap growth stocks?
 

 

World markets have instead suffered a severe deterioration in global breadth. The percentage of markets above their 50 dma have fallen to levels consistent with corrections and bear markets. Can the bull continue after such technical damage?
 

 

 

Where’s the Alpha?
After reviewing the challenges for the bulls and the bears, what’s the verdict?

 

There are three very valuable words in investing, and they are: “I don’t know”. I can imagine that in the not-too-distant future, investors will see a newsflash that Iran has agreed to negotiations with the coalition, which will be met with a melt-up response. After that, much depends on how the situation evolves. Will the geopolitical temperature recede or will the global economy slide into an energy-induced slowdown?

 

I don’t know.

 

Tactically, the markets are sufficiently stretched to the downside that they are poised for a relief rally. After that, my crystal ball gets very cloudy. Will the rebound resolve in a W-shaped or V-shaped recovery? I don’t know.

 

Under these circumstances, I suggest that investors take what alpha is available to them. The market is offering a source of alpha in the form of excessively bearish sentiment. Under-invested investors can deploy extra cash by taking advantage of the fear by constructing synthetic long positions by selling an overpriced put option and buying an underpriced call option on issues that they favour. Other investors can consider replacing existing long positions with similar synthetic longs to take advantage of excessively skewed option pricing.

 

Consider, for example, the June SPY call and put options. SPY closed on Friday at 662.63. The implied volatility (IV) of the out-of-the-money put options are higher than the out-of-the-money calls. As a higher IV translates to high option pricing, an investor willing to be long the market could sell a put and buy a call on SPY and arbitrage the difference in option premiums.

 

 

A Recessionary Bear Ahead?

Posted by Cam Hui -
In the wake of Gulf War III, the odds of a U.S. recession in 2026 have spiked in the betting markets. Even though the implied recession probability has retreated, they are nevertheless elevated.
 

 

Economic recessions are bull market killers. What are the chances of an oil shock-induced recession? Here are the bull and bear cases.
 

 

A COVID-Style Crash?
The bear case is easy to make. Just take a look at the blockade at the Strait of Hormuz. A Bloomberg podcast with Rory Johnston outlines the risks.

 

For some context, the blockade of the Strait of Hormuz (SoH) is an unprecedented event. The SoH accounts for about 20% of global energy production, or 20 million of barrels per day. To put that 20% figure into perspective, Johnston pointed out that the degree of demand destruction during the peak of the COVID Crash in March and April 2020 accounted for 20% of global energy demand.

 

In other words, if the SoH were to remain closed for a prolonged period, the global economy would have to experience a price-induced demand destruction roughly equivalent to the effects seen at the height of the COVID Crash. Under those circumstances, Johnston postulated that it would be very easy for oil prices to reach $200. That’s the apocalyptic scenario.

 

A SoH blockade also exposes the supply chain bottlenecks concentrated in that narrow passage of water. It’s not just oil, but LNG, urea, which is a key input to fertilizer production, sulfur, which is used for copper smelting, and so on. Such an event is reminiscent of the COVID-era supply chain bottlenecks that drove up prices and sent shockwaves around the world.

 

The accompanying chart shows the days of inventory available to different countries and regions under a full SoH blockade and no use of strategic reserve for different energy products. The main exposure is Asia, followed by Europe. The U.S. is a net energy exporter and it’s therefore insulated from the physical effects, but not financial effects of energy supply shocks. Not shown in the chart are the substantial petroleum reserves accumulated by Japan, and China.
 

 

Bloomberg Economics modeled the oil price depending on the length of the Strait closure. The longer the flow is interrupted, the higher the floor is in future months. A three-month closure would see Brent reach $164.
 

 

Even though the U.S. is largely insulated from the physical effects of an oil shock, New Deal democrat argues that “$4/gallon gas could take the economy from a nearly complete stall into outright recession”. The accompanying graph of gasoline prices is normalized for average hourly earnings, with $4 gasoline represented as the zero line. Viewed in that context, $4 gasoline prices wouldn’t represent a significant headwind to household expenses. But he argued that higher gas prices combined with a fragile employment market might tip the economy into recession.
 

 

The Street is turning nervous. MarketWatch reported that Goldman Sachs downgraded the forecast for economic growth, citing higher oil prices. Torsten Slok quantified the effects of $100 oil. He projects an increase of 0.1% to core inflation, 0.1% increase in unemployment and -0.1% decline in GDP growth, which is roughly in line with Goldman’s estimates.
 

 

 

Supply Buffers and Mitigation Steps
To be sure, there are ways of alleviating some of the supply shortages to buy some time.

 

The most immediate source of oil is floating barrels of Iranian and Russian crude that act as an initial buffer. This functions as a shadow SPR that can’t be refilled. Estimates vary, but they are around 70 million barrels, which amounts to 2.5 days of SoH daily flows. They’re useful, but not a game changer.
 

There’s also Iranian crude that flows through the SoH, which functions as a filter, and not an absolute blockade. The WSJ reported that “over the past six days, tankers have loaded a daily average of 2.1 million barrels of Iranian oil, higher than the 2 million barrels a day Iran exported in February, according to Kpler.”

 

Saudi Arabia has an east-west pipeline that bypasses the Strait. The WSJ reported that the pipeline carried 2.8 million barrels per day before the crisis. Aramco has promised to ramp up throughput to the stated capacity of 7 million barrels in the near future, but the loading capacity at the Red Sea port is reportedly 3 to 5 million barrels.

 

Finally, the IEA announced a release of 400 million barrel release of strategic reserves from different member states. The headline number of 400 isn’t what matters, it’s the daily rate of flow that matters. Japan announced that it will release 80 million barrels from its reserves. The U.S. announced that it will release 172 million barrels over 140 days, or about 1.4 million barrels per day. All of these measures are useful and they buy time. But they are not the solution to the 20 million per day shortfall through the SoH.

 

Let’s do some back-of-the-envelope math. The shortfall from a complete blockade is about 20 million barrels. The additional flow from the port constrained Saudi pipeline is no more than 2.2 million, Iranian sales about 2 million. Sustainable continuing flows amount for 21% of the shortfall, which is useful but not a full solution. The rest has to be made up from release of strategic reserves, which is finite.The Economist reports that IEA combined reserves amount to 1.2 billion barrels, but not all are available for use. As an example, “America’s must keep a minimum 150–160M barrels —35–40% of today’s levels — to preserve the stability of the geological caverns that serve as depots”. Reserve drawdowns have limited capacity: “Were all IEA countries to liquidate their strategic stocks at their maximum achievable rate, they could add at most 3 million barrels per day to global supply, calculates Martijn Rats of Morgan Stanley”.
 

 

During past oil shocks, OPEC members have ramped production to meet supply shortfalls. This time, the supply capacity is trapped behind the Strait. The only source of ready supply is Russian crude, whose purchase comes at a geopolitical cost.
 

 

A Narrow Path to Peace
In the face of rising oil prices, which has pushed U.S. average retail gasoline above the politically sensitive $3.50/gallon level, it’s not a surprise that President Trump is trying very hard to open the Strait.
After the initial U.S. military success in Venezuela, President Trump may have thought that he could apply the same template to Iran. But Iran isn’t Venezuela, and he may have overplayed his hand. By surviving the initial onslaught and the decapitation of the Iranian leadership, the Iranian regime appears to have gained the upper hand in the conflict by demonstrating supply chain dominance in key commodities and ominously emerging as a belligerent regional hegemon to the detriment of Gulf states.

 

It’s TACO (Trump Always Chickens Out) time, but with a key difference, which I will explain. From the American perspective, the combination of rising equity and bond volatility, rising bond yields, weak equity markets and an approaching November mid-term election, Trump is under pressure to reverse course. It’s not a surprise that President Trump is trying very hard to open the Strait.
 

 

Moreover, average U.S. gasoline prices are already over the politically sensitive level of $3.50/gallon. That’s before refineries switch over from the winter blend to the more expensive summer blend, which will add another 10–15¢ per gallon.
 

 

U.S. foreign policy is stuck between two unpalatable choices: Commit ground troops and force a full regime change. But the U.S. doesn’t have sufficient military ground forces to control Iran, a country the size and population of Turkey. Choosing such a course of action means a multi-year commitment to install a friendly government and to provide sufficient security in case the government teeters. Think of it as a Vietnam-style commitment of troops, whose ranks will need to be filled with a draft.

 

The other best-case option is a Korea-style frozen conflict. The U.S. commits to stationing troops in the region to contain a belligerent Iranian regime from bullying her neighbours. Iran will become a regional hegemon that threatens the energy, financial and infrastructure of Gulf states for the foreseeable future.
It is against this backdrop that President Trump seems to be looking for an off-ramp. The latest objectives of the campaign, according to Secretary of State Marco Rubio: “It is to destroy the ability of this regime to launch missiles, both by destroying their missiles and their launchers; destroy the factories that make these missiles; and destroy their navy.” General Dan Caine, Chairman of the Joint Chiefs of Staff, gave the same message to the press in a briefing.

 

What’s missing from that list are past demands for unconditional surrender, regime change and there is no mention of ending Iran’s uranium enrichment program. This is a signal that the U.S. is trying to open the door to a truce that can open the Strait of Hormuz.

 

Trump’s recent statements include the war will end “soon” because there is “practically nothing left to target”. When informed that Iran was laying mines in the Strait, he threatened to escalate attacks, but later backtracked and said he didn’t believe Iran was laying mines in the Strait of Hormuz.

 

Iran’s public posture has been highly assertive, but a little publicized development is a sign of the regime’s weakness that opens the door to an agreement. The Iranian regime initially said they would not allow “one liter of oil” to be shipped from the Middle East if U.S. and Israeli attacks continue. This opened the door to a truce or ceasefire if the attacks were to cease. It added an additional demand that any ceasefire needs assurances that the U.S., Israel and other regional states wouldn’t attack Iran in the future.

 

The two positions represent a start for negotiations, and there are various countries that have tried to act as mediators, one less-known development may have an earth shattering impact on the regime’s stability. The Jerusalem Post reported that Iran’s Bank Sepah data centre in Tehran was bombed and the bank had been the target of cyberattacks. The article went on to explain that “Bank Sepah is a state-run institution, largely responsible for paying the salaries of Iran’s military and the Islamic Revolutionary Guard Corps”.

 

During the 1980 Iranian Revolution, the Shah’s regime collapse was triggered when it lacked the resources to pay its troops and security forces. Bank Sepah pays the salary of low and mid-level Iranian military, militia and Revolutionary Guards. Unpaid or underpaid security forces become unreliable. There are unconfirmed reports of dissension between the Iranian Army and IRGC units about the uneven casualty rate. Attacks have mainly targeted IRGC and Quds Force units and the regular army has largely be insulated from attacks. Disproportionate losses among underpaid IRGC members, who are the backbone of the regime’s internal security apparatus, is a source of vulnerability for the regime and could pressure it to make a deal.
 

 

Nearing a Pivot
Putting it all together, the headlines look dire for investors. The global economy is staring into an abyss of a COVID-style adjustment. But I believe sufficient pressure is building on both sides to negotiate a settlement.

 

Tactically, sentiment and some technical conditions are becoming oversold. MarketWatch reported that Charlie McElligott at Nomura highlighted panic conditions among option traders: “Equities Options Skew (ESP MegaCap Tech / Mag7+) remains insanely tilted towards Downside and OTM ‘Crash’ Left-Tail Hedges, while ‘Nobody owns the Right-Tail’”. In plain English, the crowd is stampeding for put option protection and no one is interested in call option upside.
 

 

Similarly, the Zweig Breadth Thrust Indicator and the NYSE McClellan Oscillator (NYMO) have reached oversold levels comparable to the “Liberation Day” panic bottom, despite exhibiting only a minor drawdown in the S&P 500.
 

 

It’s time to buy the panic.

 

What Happened to the TACO?

Posted by Cam Hui -
Mid-week market update: I wrote on the weekend that the Trump Administration was on the verge of a TACO (Trump Always Chickens Out) pivot. The market had the hint of a TACO on March 9, when he told CBS: “I think the war is very complete, pretty much”, but changed his tune hours later: “we’ve already won in many ways, but we haven’t won enough.”

 

The TACO is being made. Here is why. Today is the second consecutive day that nationwide average gasoline prices are above $3.50 a gallon.

 

 

During past trade disputes, the TACO was accomplished with a simple Trump pivot because the opposing party was open to the pivot. This time, other belligerents in the conflict have other ideas, namely Iran and Israel.

 

 

Trading on Headlines
I have said that the main objective of the Iranian leadership is survival. After 10 days of bombing, the regime has shown a high degree of resilience and they have apparently accomplished that task. It seems that they are now trying to assert their newfound “victory” by asserting dominance over the region by threating other Gulf states.

 

By contrast, an article published the Economist tells the story of Israeli reticence: “America’s war aims may be diverging from Israel’s”. Israel is seeking full regime change, while Trump is more reticent. The objectives of the two allies in the conflict are starting to diverge.

 

As a consequence, the market is trading on headlines abd focusing on the oil price action. News stories about shipping attacks in the Strait of Hormuz, its mining, and possible SPR release are examples of headline induced volatility. The accompanying chart tells the story of how oil prices expectations have evolved. The main energy equity ETF (XLE), which is heavily weighted in Exxon and Chevron, peaked soon after the bombing began, while Brent prices continued to rise. By contrast, The oil services ETF (OIH) peaked on February 24, well before the conflict began.

 

 

I interpret these conditions as market expectatons of a short war. Emergy stocks are not tracking the rise in the front-month headline oil price, indicating that investors don’t believe that the surge in oil prices are sustainable. This is confirmed by the falling OIH to XLE ratio. A falling ratio is a signal that the market doesn’t expect a ramp in oil & gas capex consistent with the performance of oil majors, which is another indication that the surge in oil prices are fleeting.

 

 

Tracking the TACO
In the meantime, the conditions for a Trump TACO remain in play. The combination of elevated equity and bond market volatility, rising bond yields, and weak stock prices are all pressuring a TACO pivot.

 

 

Consider, for example, Trump’s response to the news that Iran a handful of naval mines in the Strait of Hormuz. He demanded that they be removed and threatened retribution. But, “if…they remove what may have been placed, it will be a giant step in the right direction” [emphasis added]. That’s a signal that he is seeking an off-ramp.

 

Tactically, I am monitoring the evolution of the major U.S. indices, which traced out a contstructive panic bottom outside day reversals (in red) on Monday. The next task for the bulls is to rally above the dotted falling trend lines.

 

The silver lining is the NASDAQ 100 against the backdrop of a weak tape. Even as the index tests the falling trend line, the percentage bullish on P&F is tracing out a positive divergence, indicating that large-cap growth could become the renewed leadership if the bulls seize control of the tape.