Introduction

There is an old adage on Wall Street that says, “the market will care when the market cares.”

That may sound horribly ambiguous, but the reality is that the market’s reaction to changing macro inputs often appears random and imprecise—until suddenly it isn’t. One day an input gets ignored, the next day it becomes the only thing that matters. That is why we spend so much time writing about macro. Macro matters.

Over the last several months, the most important input to track was oil prices, for obvious reasons. Then it became the $USD, and now rates are beginning to demand the market’s attention. Are they all related? Of course. In a world dominated by algorithmic and systematic trading, everything is interconnected. In technical terms, these are inter-market relationships.

The reality is that most CTA’s and macro-focused funds use specific macro inputs within their models to determine positioning and exposure. Nobody truly knows where those triggers sit besides the people building the models, but many of them operate on the same set of principles. When macro inputs begin triggering de-leveraging in a specific asset class, massive redistributions of capital can occur almost instantly. That tidal wave of buying and selling can move markets materially—especially when large pools of capital are running similar strategies.

So why are we telling you this?

Because when we write that the market is entering a peculiar spot with rising macro risk, DeMark signals printing, and internal metrics flashing caution, we are not saying it to sound smart. We are advocating a strategy designed to avoid dislocations.

Are we always right? No. But most of the time, we are.

For the last two weeks, we have consistently advocated being highly selective with new buys while harvesting gains in positions that have become extended alongside the broader market rally. That does not automatically imply a large correction is imminent—but it absolutely could happen. Our responsibility is to prepare readers for that possibility. If it occurs, we did our job. If it doesn’t, we will be the first to pivot and advocate getting aggressively re-positioned.

What many investors forget is that markets often take the escalator higher and the elevator lower. Indexes can grind sideways-to-up for weeks, only to erase months of gains in a matter of days. Being prepared for those scenarios matters. Preserving basis points during dislocations allows you to re-deploy capital at materially better prices if and when those opportunities emerge.

With that said, Friday’s aggressive momentum reversal did not happen in a vacuum. The conditions for it had been building for weeks: relentlessly higher oil prices, a $USD that was beginning to find sponsorship, and a rates market that looked increasingly poised to break higher.

That is not an ideal backdrop for an equity market that had already rallied +18% in just six weeks.

The first major tell that the winds were shifting came from the $USD (DXY). In our 5/13 report, we suggested a breakout was becoming increasingly likely.

We wrote:

The rates market was also signaling caution following a pair of inflation reports that came in hotter than most economists expected.

In our 5/13 report, we wrote:

Apparently, when was Friday.

The combination of higher yields, a strengthening $USD, and elevated oil prices finally forced the market to care, with the SPX and Nasdaq falling roughly ~1.25-1.5% during Friday’s aggressive momentum reversal.

Higher rates and a stronger $USD are inextricably linked to stubbornly elevated oil prices—something we have been warning about since the onset of the Iran conflict.

Higher oil prices can certainly create a short-term shock, but the real concern has always been the duration of elevated prices. Oil has now spent more than two months above the critical $88 threshold. You do not need to be an economist to understand that sustained oil prices sitting +50% above prior lows will eventually begin damaging economic activity.

We are now starting to see those pressures bleed into the inflation data, most notably within the recent PPI report, which we discussed extensively in our 5/13 report.

All of this is unfolding while the indexes remain just basis points below all-time highs following a blistering lockout rally off the March lows.

As we discussed in our last report, the relentless crowding into the AI trade has been the primary driver behind the market’s rapid ascent. In fact, just four stocks are now responsible for more than half of the S&P 500’s gains this year.

Meanwhile, the SOX is currently trading at more than 25x forward earnings, materially above its ~19x average over the last decade. Positioning has become increasingly crowded, sentiment has shifted materially higher, and technical signals across many of the leadership names are now flashing overbought conditions.

That does not mean the trend is over.

But it does make the setup considerably more fragile.

It is no surprise that semiconductors—after rallying nearly ~70% off the March lows—now carry some of the most bullish expectations across the buyside. But improving sentiment is no longer isolated to just AI and semis. Broader risk appetite has materially improved as the rally has extended, layering in yet another element of risk beneath the recent advance.

So now what?

A resolution to the Iran conflict still appears far away, and increasingly aggressive rhetoric out of the Trump administration suggests the current cease-fire may be on fragile footing. Whether that rhetoric is simply negotiating leverage designed to pressure Iranian officials into an agreement—or something more serious—is anyone’s guess.

At the very least, however, it suggests oil prices are likely to remain elevated for the foreseeable future.

That presents a meaningful headwind for equities until the market is given a credible reason to believe the conflict is nearing resolution and normal passage through the Strait of Hormuz is restored. Until then, markets remain largely hostage to the direction of oil prices.

Now let’s see what the charts are telling us.