Middle East Conflict Roils Markets
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Elevated geopolitical tensions, another hotter-than-expected inflation report, and rising bond yields fueled a decline in stocks this past week, with most of the week’s 1.6% decline coming on Friday. Sharply heightened fears of an impending attack on Israel by Iran/Iran proxies spurred a 1.46% drop in the S&P 500 on Friday, a 1.62% decline in the tech-heavy Nasdaq, and a steeper 1.93% decline in the small-cap Russell 2000 index.
Breadth was very poor on Friday, and the action “underneath the surface” was worse than the major indexes would indicate, which is usually the case when markets go heavy “risk-off.”
Fears of the impending attack on Israel were born out on Saturday, as Iran launched over 300 drones and missiles at Israel, with the vast majority of them being intercepted/shot down. This is a very fluid event, and nobody really knows for sure what’s going to happen; only a relatively small number of people in the world knows how the Israeli war cabinet might be planning in response to this attack. But as is usually the case, the “tape” is going to shed a lot of light of things when trading starts on Monday, and as we get further into the week.
Let’s look at the major indexes, with the caveat that market reactions to geopolitical events such as this often trumps or dilutes traditional technical analysis concepts, such as short-term support levels.
Many eyes are on the S&P 500’s 50 dma, as the index is teetering on that often-watched moving average (as a level of medium-term price support). The S&P 500 hasn’t closed below its 50 dma in 5 months.
The tech-heavy, mega-cap heavy Nasdaq 100 is once again teetering on its 50 dma.
Absent a big surprise, the market is likely to open down sharply on Monday, but I recommend not making any hasty decisions and watching to see where there’s pockets of strength and weakness. Furthermore, where the market closes on the day — relative to where it opens — is vastly more important than where it is trading 10 minutes or an hour into trading. I’ll elaborate on this more after the market closes on Monday.
A few areas I’ll be watching very closely are oil, gold and silver. All have had strong runs over the past 6 weeks. Those rallies were buttressed by escalating geopolitical concerns after the April 1st Israeli strike on Iran’s consulate in Syria that Iran has now struck back in retaliation for.
As you would expect, oil, gold and silver all rallied Friday morning as impending attack fears jumped, but they all pulled big intraday downside reversals — especially gold and silver. No doubt some of this was profit taking after their big rallies, which were in part spurred by expectations of a potential Iran retaliation. Buy on the rumor, sell on the news.
The chart of the Gold Shares ETF (GLD) shows the big intraday downside reversal on heavy volume. This kind of price-action normally smacks of at least a medium-term top after a security has had a big run. But this isn’t normal times as geopolitics have thrown a lot of big uncertainties into the markets.
The Silver Trust ETF (SLV) shows the same intraday downside reversal after rallying strongly in the morning.
Crude oil was up less than 1% on Friday, which indicates that the market didn’t yet foresee any interruption in oil supplies coming out of region. And if it doesn’t rally “significantly” on Monday, after Saturday’s attack, it will again suggest the same.
I suspect that oil, gold and silver will be rallying again on Monday morning due to regional conflict escalation fears. But if that rally is met with fairly strong selling, it suggests to me that not only are those commodities probably due for more short or medium-term weakness, but that the “market” doesn’t necessarily see the conflict substantially broadening out to a wider regional affair.
Or course, the inverse is true as well. If those commodities rally strongly on Monday, and hold most of their gains at the end of the day, it suggests a continued geopolitical risk overhang on the markets and a continued risk-off environment for equities.
I don’t want to speculate too much right now about how the market is going to react on Monday or throughout the rest of the week. Again, I’ll watch the tape and the market’s price-action as it provide clues; as it always does.
One of the things I’m most interested in is how the stock market responds to a potential moderating of Middle East tensions.
If you’re a big market bull right now, one thing you don’t want to see is the market continue to have subpar breadth if we see geopolitical tensions ease in the near future. That would suggest that the market is likely going to continue to pullback/correct as it discounts reduced rate cut hopes and higher Treasury yields.
The market has been showing technical indications of momentum and breadth deterioration the last 2-3 weeks. For example, back on January 4th, I tweeted that the NYSE McClellan Summation Index was starting to roll back down, which is normally interpreted as a sell signal or at least a red flag. At the time, I wrote that I thought that we would only get a shallow pullback. After pulling back and rallying a bit, the intermediate-term momentum indicator has again turned back down and is threatening to make a lower low, which would suggest a longer period of poor or subpar momentum. Exogenous geopolitical risks are obviously muddying the waters.
I’ll update this indicator, and/or some other momentum and breadth indicators, after we see how the market responds early this week to Saturday’s attack. How the market responds on Monday, and very importantly where it closes relative to where it opens in the morning, will shed a lot of light on the market’s prospects over the coming weeks.
On to a new/updated long & short focus watchlist, and a discussion of Wade’s Market Insight’s (WMI) current holdings; including our gold and silver miner stock positions of which we have already taken some partial profits (scaled out of) on the positions. And as always, I’ll be posting frequent market commentary on WMI’s private Twitter (X) page.
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