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Introduction

No — the market did not break out last week. If anything, it feels more like a game of Breakout, the classic Atari title where a paddle ricochets a ball upward, slowly chipping away at rows of bricks. Progress is incremental, uneven, and often frustrating.

The U.S. equity market right now feels eerily similar — for the past five months, price has done little more than bounce between the same upper and lower bands. It’s been a tight, frustrating range with little real progress. Every rally runs into overhead supply, while each dip finds a paddle of buyers waiting below. The bricks haven’t disappeared — they’ve simply been chipped away slowly.

That’s what prolonged consolidation looks like: not weakness, but stored energy. Eventually, the ball finds the seam. And when it does, the pace of the game changes quickly.

When this range resolves, it is unlikely to do so gradually. Long consolidations tend to break decisively, revealing the market’s underlying trajectory. What we can say today is that the environment remains non-trending and frustrating. Our response has been tactical: buy dips, sell rips. That approach has worked well as repeated swings continue to wreak havoc on performance, with gains evaporating almost as quickly as they’re earned.

Outside of the brief November dip that lasted less than a week, the range since October has remained exceptionally tight — roughly 4% peak to trough — with each attempted breakout quickly rejected. We’ve shown numerous charts highlighting the historical precedent for this type of compression, so we won’t belabor the point here.

The leadership groups we’ve been highlighting remain cyclically exposed and, importantly, are still the only areas exhibiting sustained trends. That hasn’t changed — and it continues to buoy the major indexes despite the incredible carnage beneath the surface, particularly in software.

Energy, in particular, has trounced broader market returns and will likely see another boost when markets reopen following the weekend’s escalation fears surrounding Iran. The obvious question now: is this the ultimate top for energy? Time will tell, but the setup is increasingly there.

One has to consider that escalation risk in Iran has likely been embedded in energy prices for months. Military engagements of this scale rarely materialize overnight — they involve prolonged planning and signaling. That dynamic raises the odds of a classic “sell-the-news” response.

That said, the situation remains fluid. With traffic through the Strait of Hormuz reportedly disrupted, near-term pressure on crude prices — and by extension energy equities — is entirely plausible.

We would be sellers into strength. More on that below.

Last week also saw a rotation back into some of the lagging areas of the market — most notably software — following the NVDA report. If you recall, this aligns with the framework we outlined in our 2/16 report: that NVDA could act as a catalyst for rotation out of semis and into the market’s most beaten-down segments.

That thesis largely played out, although emerging fears around private credit contagion quickly dampened some of the enthusiasm. Sector bottoms are rarely single events — they’re a process. What we may be witnessing now is the early stage of that process beginning to unfold. Something to watch closely.

Fears of credit contagion — sparked by Blue Owl Capital halting redemptions in one of its funds — ignited broader concerns and weighed heavily on financials across the board.

Credit contagion will always stir the bears — and it’s obviously something to monitor closely. But it’s worth asking: how many times over the past few years has a flare-up triggered a selloff, only for the market to recover in the days and weeks that followed?

The table below highlights the major financial contagion episodes since 2022 and the subsequent recovery speed in the S&P 500. The takeaway is fairly clear: outside of 2022 — which unfolded in the middle of a bona fide bear market — the median recovery time has been roughly 2–4 weeks.

These flare-ups always carry some merit, but it’s worth asking how much is being amplified by the broader narrative environment. Shares of alternative asset managers have been sliding for months amid concerns around underwriting standards. More recently, the selloff in software has intensified those fears, given the heavy lending exposure many private credit platforms have to the sector.

In that sense, the anxiety is being magnified by the AI disruption narrative — a dominant theme that is likely bleeding into contagion fears. Whether that ultimately proves justified remains to be seen, but the reflexivity is clear.

The closest public proxy for tracking stress in private credit is the BDC ETF (BIDZ). As the chart illustrates, BIDZ has been under pressure for nearly two years. This is not a new development, nor one that institutional investors are just now discovering. By most measures, this is a mature decline.

That doesn’t mean it can’t go lower. A sharp redemption cycle could create real stress and potentially force some form of intervention. However, when mature declines intersect with peak concern, it argues for some skepticism that the bulk of current fears are entirely undiscounted.

We’ll only know with time, of course — but it remains another risk factor worth monitoring.

Lastly, Friday’s PPI print came in hotter than expected. The Producer Price Index rose 0.5% — the largest increase since September — following a revised 0.4% gain in December. Back-to-back firm wholesale price readings add to the growing body of evidence that progress on inflation remains uneven.

Higher duties on imported materials have also played a role, prompting many producers to raise prices or pursue cost offsets to protect margins.

Higher inflation alongside slowing growth has reinforced the stagflation narrative — a dynamic increasingly reflected in market leadership, with cyclicals continuing to outperform.

The environment is messy — and getting messier. The persistent ping-pong price action reflects a market wrestling with a resilient economy on one hand and an increasingly complex set of crosscurrents on the other, most recently the escalation of U.S. involvement in Iran.

Tricky to navigate, to say the least.

Let’s see what the charts have to say.