Bull > Stagflation

1.) HEADLINES – I’ve probably sounded like a broken record of late suggesting to simply ignore all the headlines about the Iran conflict/war. But, as we analyze what’s taken place so far, only three things really mattered… items I’ve written about as we were going through it all:

• 𝗩𝗜𝗫 𝗖𝗔𝗣𝗣𝗘𝗗 𝗔𝗧 𝟯𝟬

Markets kept falling, but volatility didn’t expand dramatically. You even saw days where the indexes were down with VIX down. That’s not fear rising, that’s what it looks like when hedges are being unwound. This tends to be the first step for markets to find a bottom.

• 𝗢𝗜𝗟 𝗦𝗣𝗜𝗞𝗘𝗗 𝟭𝟬% 𝗕𝗨𝗧 𝗘𝗤𝗨𝗜𝗧𝗜𝗘𝗦 𝗗𝗜𝗗𝗡’𝗧 𝗖𝗔𝗥𝗘 𝗔𝗦 𝗠𝗨𝗖𝗛

Yesterday the NASDAQ opened -2% and closed flat on the day. Oil hit a high of $118 and reversed to close at $110.

• 𝗠𝗔𝗥𝗞𝗘𝗧𝗦 𝗦𝗧𝗢𝗣𝗣𝗘𝗗 𝗥𝗘𝗔𝗖𝗧𝗜𝗡𝗚 𝗧𝗢 𝗡𝗘𝗪𝗦

“Headline” fear lost its power. Price action is always more valuable than headlines. It simply does no good to watch “news” these days… unless of course you just like feeling bad/angry. Now we just look for market flows to re-strengthen with the catalyst of the war noise more or less behind. If today’s move higher holds, those flows will likely return. Are we likely to have lingering volatility? Sure. But volatility goes both ways too.

2.) STAGFLATION – There’s been a lot of chatter about 1970s-style “stagflation” lately. This is basically where you have decelerating growth and accelerating inflation. A lot of this chatter has come through a chart that has been circulating about the '70s period where 1-year TIPS (Treasury Inflation-Protected Securities) breakeven inflation rates were used to build the forward analysis. The issue is that TIPS aren’t always accurate. Use CPI swap rates, and the picture for returned '70s-style stagflation is much less concerning.

3.) BULL – Think about what we’ve already lived through this decade, and we’re barely more than halfway through. A pandemic crash. A full-blown bear market. Multiple double-digit pullbacks along the way. By any historical standard, that’s a lot of volatility packed into a short window. Now the recent noise of never-ending wars has had investors bracing for the next collapse. But that’s not how this works. Big drawdowns aren’t supposed to show up on a schedule. After seeing so many bumps in a row, people start expecting them everywhere. They get conditioned to it. When you combine delusional mindsets with heavy short exposure and improving price behavior underneath the surface, you get the kind of setup where moves don’t just grind higher, they rip. Right now S&P 500 Futures (ES) are up +2.6%, but they also have some very big levels at 6840, 6850, and 6860. I’d expect some resistance at these levels, but any break higher from this zone and the market likely runs. A few weeks ago I pointed out the small-cap Russell 2000, the Dow Jones Transportation Average, and the Emerging Markets Index. All three had already broken out to new cycle highs, but the question was whether those breakouts would hold on a retest. What we wanted to see was former resistance turn into support. Price comes back down, finds buyers where it used to find sellers, and then turns higher again. Done.