@theMarket: Stocks Held Hostage by Threats From Both Sides

Trump's Iran war speech on Wednesday night was not the hit that he hoped it would be. It only lasted 19 minutes, but it was more than enough to send investors' hopes crashing and the price of oil higher by 11 percent. Yet hours later, on Thursday morning, Iran hinted at some progress toward opening the Straits of Hormuz. Stocks rallied back to even. Go figure.

 

It was a fitting ending to a wild holiday-shortened week for the markets. The S&P 500, after dropping 70 points on Monday, hit 6,343.72, down 9.1 percent from its record high made on Jan. 27. On Tuesday, the last day of the quarter, and Wednesday, markets gained more than 3.5 percent but then fell flat on its face on Thursday. A combination of events provided the triggers.

 

After five weeks of declines, markets were oversold and were stretched to the downside. We were within 1 percent of my 10 percent downside target. The indexes were flirting with a level that, if broken, would have led to a lot more downside. To me, markets seemed primed for a relief rally. All we needed was a couple of comments from the administration.

 

The tendency of professional money managers to "window dress" their clients' portfolios (by selling their losers and buying the quarter's winners) helped set the stage. In addition, the execution of a quarterly $30 billion hedging trade fueled the fire. And lastly, as I warned readers before, with the markets teetering on the edge, Donald Trump announced that the end of the war was all but over and the Straits of Hormuz was someone else's problem to fix. Markets roared higher.

 

It seemed to be all coming together for the bulls. Wall Street anticipated that the president, in his first wartime, primetime speech to America on Wednesday night, would further clarify his earlier comments. That was not to be. Instead, his words seemed to indicate additional short-term aggression and at least 2-3 weeks of further conflict. The president's key takeaways on Iran were his vow to "send them back to the Stone Age" and that the war would end soon.

 

Shortly thereafter, a U.S./Israeli airstrike launched a large-scale attack on Iranian infrastructure across Iran. Trump did not mention the Straits of Hormuz in his address, although the open passage of oil through that body of water is key to a return to global growth and to reining in inflation. Yet from the market's point of view, there was still no clear pathway to peace.

 

Overnight, futures plummeted, and markets were down by more than 1 percent Thursday morning. However, stocks recovered on reports that Iran and Oman are drafting a protocol to monitor transit through the Straits. That was old news, but in this market, the bulls were looking for any port in this storm. Traders used it as an excuse to bid up stocks anyway.

 

Equities ripped higher just before the Iranian public announcement was released on Thursday morning. Leading one to wonder if Iran was joining the ranks of the administration's insider traders, or did someone in the White House profit once again? We will never know.

 

The Iranian release did not specify which nations will be permitted passage, or at what cost. The statement reportedly originated from the Iranian state news agency. Oil, as I wrote at the onset of this conflict, is my primary indicator for predicting financial market direction. The Iranian news barely impacted the $11 surge, raising a barrel of oil to $110. For context, this translates to an overnight jump of 60 cents or more per gallon in gas prices.

 

For readers who may have missed it, and I assume most did, Iran's parliament approved a bill a week ago that imposes transit fees of up to $2 million on all ships passing through the Straits. It also bans vessels from countries imposing sanctions on their country and allows selective access to friendly states such as China, Russia, India, Pakistan, Iraq, and Bangladesh. The monitoring and control of maritime traffic news was part of the same bill.

 

Based on statements from over 40 European leaders and ministers, forcing passage through the Straits is no longer an option, regardless of Donald Trump's wishes. They would rather pay a toll or negotiate with Iran than join Trump's war. None were consulted before the attack, but after the fact, they were expected to participate in a decision made without their input.

 

On Friday, the March non-farm payroll showed 178,000 new jobs added. Although this exceeded expectations, as I've noted before, don't accept this figure at face value. Typically, at least 60,000 jobs are overstated each month. Furthermore, revisions are large, for instance, last month's loss of 133,000 jobs was revised downward by 41,000, while January saw an upward revision of 34,000.

 

Year-to-date, the S&P 500 is only down 6 percent after gaining more than 3 percent in two days this week. That is encouraging given the noise and destruction of the past weeks. This is also a holy week for much of the world, which may invite more violence. In addition, weekends, especially three-day weekends, have become too risky for most traders to hold longs.

 

Are we out of the woods? Not yet. We need to see oil and the dollar both drop substantially next week before calling a bottom in the market. In the meantime, to those who celebrate, Happy Easter, and for those who don't, bless you anyway!