Things you need to know
- Risk OFF, Risk ON – Just another day on the street.
- Machines make a mess, humans to clean it up.
- The Strait is not closed – according to Trump, Oil will flow
- Global markets go from panic to jubiliation.
- Try the Pasta Mimosa
Yesterday was one of those classic market days that perfectly illustrates how modern markets react to headlines — fast, emotional, and often exaggerated. First it was Risk Off and then it turned into Risk On as the pendulum swung both ways.
The morning began with full-blown hysteria as geopolitical tensions overnight sent oil prices screaming higher and stocks screaming lower. Overnight on Sunday – oil surged nearly 30% to $119.48, in what was panic buying. The hysteria that gripped markets on Sunday evening began in the oil pits and then spilled over into the stock ‘pits’. (that’s a throwback to when there was a ‘pit’ – there isn’t but go with it). It was the same story – crude futures exploded higher on fears that the escalating Middle East conflict was going to threaten supply routes (as if it was a fait accompli) thru the Strait of Hormuz.
Global stocks markets came under pressure – Asia got slammed, European stocks whacked and US futures overnight were a disaster…Dow, S&P, Nasdaq, Russell futures all got punched in the face.
Now remember – it is the thin Sunday-night trading conditions, that triggered an immediate surge of buying oil as hedge funds, energy desks, and systematic trading models reacted to the ‘possibility’ of this supply shock. And then it’s all about the technology (think smart algos) – because once crude began pushing through key technical levels, the machines took over*. Pushing oil to $120 overnight – highs not seen since June 2022 following the Russian invasion of Ukraine. (do you see the comparison?)
*What is key to note here is that it works both ways…. for oil and stocks and by the way – for bonds and precious metal – once tech levels are pierced or breached – the machines take over and begin to BUY or SELL – depending on which way it happened. So, while the energy ‘funds’ were buying oil, the stock ‘funds’ were selling stocks, the gold ‘funds’ were buying gold and the bond ‘funds’ were selling bonds…
CTA (Commodity Trading Advisors) trend-following funds (think Momo guys) started buying the breakout, volatility-targeting strategies (aka volatility arbitrage) adjusted exposure, and options dealers were forced to hedge rising call positions by purchasing futures and this creates a powerful feedback loop that sent oil sharply higher in a very short period of time in what I always remind you is a ‘shoot first/ask questions later’ response.
And this is not our first rodeo – we have seen this before….and will see it again – In the afternoon – Trump held a press conference telling us in no uncertain terms that the war in Iran will end very soon and that the Strait of Hormuz will not be closed. He offered US navy escorts and said that the US will provide insurance support for those tankers. He also announced sanction relief for Iran as part of a broader deescalation discussion if they came to the table.
Now – if Iran should try to prevent tankers from navigating the Strait, they will be met with a response 20 times as great. In fact, he made it clear – ‘We wiped every single force in Iran out, their naval power is now sitting at the bottom of the sea, we target their drones and missiles and their manufacturing ability has been decimated’. He even went onto say that he wants to take control of the Strait to prevent this from ever happening again and he reminded us that “U.S. military strikes on Iran have eliminated much of the regime’s anticipated leadership succession bench” –
“Most of the people we had in mind are dead,” Trump told reporters Tuesday. “So, you know, we had some in mind from that group that is, is dead. And now we have another group. They may be dead also based on reports. So, I guess you have a third wave coming in. Pretty soon we’re not going to know anybody.”
And with that the risk premium that was being priced in began to disappear. Oil fell off the cliff – pulling back from the early morning highs to end the day at $94.00 and this morning oil is down $8 trading at $86.72.
All this does is remind us how modern markets behave – headlines trigger the first reaction that cause algos to amplify the move, and only later does the market step back and reassess the real fundamental impact. And that once again speaks to having a plan and not making emotional decisions.
Stocks that were burning down in the morning – suggesting negativity – were ‘on fire’ in the afternoon – suggesting positivity – (see how I used the fire analogy to express both negative and positive?) taking back ALL of those morning losses to end the day higher and you can say substantially higher because at their worst – we saw 2+% moves lower early on. By the end of the day the Dow added 240 pts or 0.5%, the S&P up 56 pts or 0.8%, the Nasdaq rose 310 pts or 1.4%, the Russell up 28 pts or 1.1%, the Transports added 88 pts or 0.5%, the Equal Weight S&P up 25 pts or 0.3% while the Mag 7 gained 341 pts or 1.1%.
Again – a dramatic reversal that captures how quickly the tone can change. Remember, nothing structurally changed – oil spiked on hysteria and the algo’s panicked. For the day trading crowd, it was a bonanza, but for the long-term investor it created ‘agita’ as we watched the machines make a mess.
The was no eco data yesterday and today we’ll get Existing Home Sales that are expected to be down 0.8% – I’m gonna say, I don’t believe I, mortgage rates are lower (currently below 6%) and overall prices are declining – all you have to do is look at the daily action reports that show recent price cuts in housing markets around the country…. But let’s see what they tell us.
Bonds like stocks were under pressure early on but ended the day higher. The TLT and TLH both up 0.9% & 0.6% respectively. 10 yr rates fell 7 bps to end the day at 4.10% – this morning they are up 2 bps at 4.12% while 30 yr rates fell 8 bps to end the day at 4.71% – this morning they are up 4 bps at 4.75%.
Gold continues to trade in a very tight range – $5,000/$5200. This morning it is up $30 at $5,170. Remember – gold is pricing in the possibility of re-igniting inflation and the action in the dollar. This morning the dollar is down 50 cts at $98.66 – leaving it sitting atop the intermediate term trendline. Now if the trendline fails decisively – and the dollar declines further – down to the short term trendline at $98 – expect gold to rally and break out at $5,200. Should it hold – then gold will continue to churn.
The Volatility Index – VIX- the market’s fear gauge — must be exhausted. Since the start of this conflict 9 days ago it surged 98%, peaking at 35.30, creating all kinds of havoc across asset classes as investors rushed to price in the worst-case scenario. But that panic is beginning to fade. The VIX has now pulled back about 35% from that spike, settling near 24.13, giving a new voice to stocks.
That said, we’re not out of the woods yet. The key technical level remains the trendline around 18.50. Until the VIX falls back to there, the market is still a bit anxious. Anything above that level suggests investors remain on edge and markets will remain choppy. Capisce?
Asian markets surged overnight….South Korean taking back 5%, Japan +2.9%, Hong Kong +2.2%, Taiwan + 2%, China +1.2% while Australia added 1.1%
This morning European markets are in Rally Mode! Spain up 3%, Italy + 2.8%, Eurostoxx + 2.7%, Germany up 2.5%, France is up 2% while the UK is up 1.6%. It’s all about those falling oil prices. Period.
US futures are stable and I think that is because the market is awaiting the next headline…. Iran did say that ‘ships navigating the Strait need to be careful’ and that does suggest some caution. Now imagine what happens if any ship encounters difficulty while travelling thru the Strait today. Dow futures up 55, S&P’s up 6, Nasdaq up 50 and the Russel is flat.
The S&P closed at 6,795 – up 56 points – which on the surface makes it look like just another ordinary day on the street. But that closing print hides the real story. In the early morning sell-off the S&P plunged all the way down to 6,636, putting it just 50 points away from the 200-day moving average, the long-term trendline I’ve been talking about for weeks now. In fact, the market came within 0.007% of kissing that level, which tells you just how close the markets came to testing that KEY technical support.
After the afternoon reversal and rally, we are now right back in the middle of the two trendlines. The long-term trendline at 6,586 (the 200-dma) and the intermediate resistance level around 6,840. In other words, the market is still trapped in the middle of the range, waiting for the next catalyst to determine whether we test support again or break up and through resistance.
Call me at 561-931-0190 and let’s talk about whether the risk in your portfolio actually matches your tolerance — because this works both ways. You may be taking too much risk… or not enough to reach your goals.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Pasta Mimosa
This take all of 15 mins….as long as it takes you to boil the pasta.
First bring a pot of salted water to a rolling boil.
Also bring a small pot of water to boil the eggs.
Now for this you need: ½ lb. of Rigatoni, 2 eggs, fresh ricotta, fresh grated parmegiana, s&p, saffron, diced onion and olive oil.
Now, boil 2 eggs for 7 mins for so – you want the yolk to be semi-cooked – not soft, but not hard -capisce? When cooked – peel the eggs and remove the yoke. Set aside.
Now in a large sauté pan – add a splash of oil and add the onion. Sauté on med high, careful not to burn.
Add the pasta to the water and cook until aldente – 8 mins.
While that is happening – crack 2 eggs into a bowl, add the ricotta and the parmegiana – mix to blend together.
In a small bowl – add a packet of saffron to some hot water -set aside.
When the pasta is cooked – add to the sauté pan. Next – add in the ricotta mix. Stir to coat. You can add half a ladle of the pasta water here. Now add in the saffron to give it a deep yellow/orange color. Mix well – keeping the sauté pan on med low heat.
When it comes together – don’t forget to take the soft yolks – break them up on the pasta and serve.
Yum.
Buon Appetito.