S&P 500 In A Hormuz Strait Jacket

S&P 500 Driven By Headlines

The headlines and performance of the S&P 500 last week were, in part, shaped by hot PPI data and the Jerome Powell statement that he has no clue what is going to happen with inflation.

However, the closure of the Straits of Hormuz remains the dominant headline.

The ongoing closure of the Straits of Hormuz is not just a problem for global economies; it’s also a factor in the relative and perceived success of the U.S. military operation.

The bond market is signalling concern about the inflationary consequences of the conflict. The 10-year yield spiked last week, and high-yield credit spreads widened while the S&P collapsed.

As noted in our previous post, if oil prices, the U.S. Dollar and bond yields continue to rise in lockstep, that is a negative environment for the S&P.

The balance of probability suggests that a break above 4.5% in the U.S. 10-year yield will likely trigger further institutional selling.

No-Man’s Land

The S&P 500 is in a no-man’s land between the initial oil shock and the eventual impact on hard data. It will likely remain in that no-man’s land until late second or early third quarter.

Historically, the best cure for high oil prices is high oil prices (demand destruction).

Despite surging again on Friday, oil remains in a bear-flag or inside-bar consolidation pattern from a technical analysis perspective.

The balance of probability suggests that oil will trend lower this week and test $77 in the next week or two.

S&P 500 Key Levels

As predicted, the S&P 500 is testing the key support level, and options put wall at 6500.

Confirmation below this level today could trigger a cascade to 6100.

The Friday close is now below the 200-day moving average at 6600. A rebound from current levels will likely meet resistance at 6600.

At this point, we don’t have a strong conviction about the market’s direction for the week.

That said, if you get the trajectory of the U.S. dollar right, then you get the market trajectory right.

The U.S. dollar is hitting a resistance level at $100. It is showing little sign of the same level of upward trajectory and flight to safety effect seen at the start of the Russian invasion of Ukraine.

Given this uncertain backdrop, and with market structure still forming, traders should consider “renting” the market rather than “owning” it. Keep positioning light and have cash available to respond to extreme moves.

As context for the potential market trajectory, historically, the S&P bottoms 15 trading days, or 3 weeks, after a major geopolitical event, then chops sideways for the following 30 trading days.

So, has Trump called the bottom with his 48-hour deadline for Iran to open the Straits of Hormuz?