Introduction

Well, we finally reached our gap-down targets on Friday—but the backdrop has only deteriorated. War headlines continue to escalate, setting the stage for what could be an ugly open on Monday and potentially the kind of cathartic “puke” we were looking for last week.

We had advocated for adding some tactical exposure early in the week, but that proved premature. Once again, the familiar pattern played out—early-week strength was sold into, fading as we moved toward the weekend.

At its core, the market simply isn’t buying the idea that diplomacy between the U.S. and Iran is progressing. If anything, the price action suggested the opposite—and judging by the steady drumbeat of escalation over the weekend, the market was right to be skeptical. Monday’s highs ultimately marked the peak, with price cascading lower into the close of the week.

While the downside target zones we outlined in the 3/22 report have largely held, the manner in which they were tested leaves much to be desired.

What do we mean by that? Gaps are emotional—they reflect urgency, fear, and forced positioning unwinds. While Friday did open lower, the gap was relatively mild (~20 handles), and instead of a sharp, panic-driven flush, the market simply bled lower throughout the session.

That’s not capitulation—that’s controlled distribution. And it’s a very different signal than the kind of cathartic washout we were looking for.

The SPX is now down five consecutive weeks—the first occurrence since May 2022. However, it’s worth noting that the extended weakness in April 2022 did little to arrest the broader decline. In fact, the market continued lower for an additional two weeks before seeing even a modest reversion.

The key distinction then versus now is maturity. The 2022 drawdown was already well-developed, roughly 13 weeks in, compared to just ~5 weeks in the current move. Additionally, the magnitude differs materially—the present drawdown is roughly half the size of what we experienced during that 2022 stretch.

Five-week losing streaks tend to see continuation rather than immediate reversal.

None of this, in isolation, is particularly meaningful—but it does raise the question of whether the market is beginning to price in a recessionary outcome. To be clear, the 2022 bear market was not accompanied by a recession. It was largely a function of rates repricing higher to combat shockingly elevated inflation (~9%).

That drawdown ultimately saw the SPX decline ~27% peak-to-trough over roughly 40 weeks. Whether or not we ultimately enter a recession this time around is, frankly, beside the point.

What does matter—and what we highlighted in our 3/22 report—is that rising rates remain the primary headwind for equities. Oil is the other piece of the puzzle, but the two are inherently linked. Sustained strength in oil feeds inflation expectations, which in turn pressures yields higher. Conversely, a meaningful reversal in oil would alleviate that pressure, allowing yields to move lower and providing some relief for risk assets.

As it stands, the 10-year yield is now pressing toward its highest level since June ’25—hardly a backdrop that is conducive to equity stability.

This is occurring as the 2-year yield begins to roll over—a meaningful development. Why does that matter? Because the front end of the curve is far more sensitive to monetary policy expectations.

In other words, the bond market is starting to price in the potential for aggressive rate cuts, likely in response to rising recession risk.

So while the long end (10-year) is being pushed higher by inflation and oil dynamics, the short end is beginning to sniff out something very different—policy easing. That divergence is not only notable, it’s typically a signal that something is breaking beneath the surface.

This dynamic has pushed the 2s/10s spread off the lower end of its consolidation range, triggering a reversal back higher.

Importantly, this isn’t a “healthy” steepening—it’s being driven by growth concerns and shifting policy expectations rather than improving economic momentum. That distinction matters.

A move like this, for the reasons outlined above, is typically not constructive for equities.

This is all unfolding as gold is getting bid again, following last week’s sharp selloff that ultimately produced a hammer reversal candle.

We had flagged the likelihood of a counter-trend bounce in gold—and that now appears to be playing out.

At first glance, this may seem like noise—but it’s actually a fairly meaningful macro signal. Gold catching a bid while the front-end of the Treasury curve rolls over is not coincidental; it’s the market quietly repricing the path forward.

When gold moves higher as the 2-year yield declines, that’s real yields compressing. It reflects a bond market beginning to lean toward policy easing—not from strength, but from slowing growth expectations. In isolation, that dynamic can be constructive over the intermediate term, but in the near term it tends to signal underlying unease—capital rotating toward safety while duration begins to price in a problem.

We saw this most cleanly in late 2023, just ahead of the powerful Q4 rally—yields peaked, gold broke higher, and the market began to price a Fed pivot.

The key difference now is the backdrop. This same signal is emerging alongside elevated geopolitical risk and a firmer energy tape, creating a more complicated mix of growth scare and inflation pressure. That’s not a clean setup.

Net-net, it reinforces a tactical regime. Rallies can be sharp if rates continue to move lower, but without confirmation from breadth and credit, this looks less like a clean pivot and more like a market probing for stress before resolution.

Real yields are beginning to decline, as reflected in the chart below. The issue is why—and right now, the decline appears to be driven more by growth concerns than easing inflation. When that coincides with elevated oil prices, the market is effectively pricing in a slowdown, if not outright recession risk.

This setup shares clear parallels with the 2025 “tantrum” dynamic—but with a more complicated overlay. In both instances, the market initially reacted to higher-for-longer policy pressure, only to quickly pivot as front-end yields rolled over and real yields compressed. That shift signaled policy had likely tightened enough to begin impacting growth.

The move—rates down, gold up—wasn’t about inflation being solved. It was the market sniffing out stress beneath the surface. And in 2025, that ultimately set the stage for a tradeable rally once positioning reset.

The difference now is the backdrop. That same signal is emerging alongside firmer energy and elevated geopolitical risk, which muddies the message and introduces a more stagflationary undertone.

Net-net, the parallel suggests we’re likely in a similar transition phase—from tightening shock to growth scare—but with a higher bar for a clean, sustained risk-on move.

As much as we’d like to declare this corrective phase complete, that would be premature. There are simply too many moving pieces, and the geopolitical backdrop remains highly fluid.

That reinforces our tactical posture here—we need further confirmation from both macro inputs and internal signals before leaning more aggressively in either direction.

Time to check the charts.