Introduction

The market’s mess is only getting messier. In our weekend report, we noted that oil would dictate the market’s directional cadence this week—and likely for the foreseeable future. That was not a heroic call, but an accurate one.

Overnight, crude collapsed from $120 per barrel to below $90, igniting a sharp rally in equities and sending markets far higher than Sunday night futures had suggested. The speed and magnitude of the move highlight just how tightly risk assets are now tethered to developments in energy markets.

Oil, however, continues to be driven by waves of misinformation and headline volatility, making it extremely difficult to navigate. That said, the fear-driven top appears to be in place, and we suspect crude will now begin to trade within a much narrower range.

The bigger question is how long that stability lasts.

Remember, after the Russia–Ukraine war began, oil initially spiked to roughly $130 per barrel, but then settled into a three-month consolidation before ultimately making a lower high. A similar path could unfold this time as well, with energy prices stabilizing at elevated levels rather than immediately collapsing.

If that scenario plays out, the result would likely be a persistent inflationary impulse spreading through the global economy, which in turn could begin to pressure consumption trends. That type of backdrop is far from ideal for earnings growth or equity markets.

The negative correlation between oil and the SPX did not fully peak until the summer of 2022, around the time the market became confident that oil had indeed put in a lower high.

It’s important to note that during that period the Fed was in the midst of an aggressive rate-hiking cycle to combat rapidly rising inflation, so the current environment is not a perfect apples-to-apples comparison.

That said, the parallels are difficult to ignore. The risk of renewed inflationary pressure grows the longer the conflict persists, and that dynamic could introduce additional uncertainty around the FOMC’s expected rate-cut path.

At that time, the SPX was trading at roughly 22x forward twelve-month earnings, which is broadly in line with current valuation levels. That multiple ultimately compressed to around 15x before the market bottomed in 2022.

While we are not calling for that magnitude of multiple compression, the concern itself is not unfounded. In fact, some degree of multiple compression is already underway, reflecting the growing uncertainty surrounding inflation, interest rates, and the broader macro backdrop.

The abrupt reversal in oil was driven by news that the G7 may release strategic reserves to ease supply constraints, alongside positive remarks from the President suggesting the conflict may be progressing ahead of schedule. Whether those comments ultimately prove accurate is not for us to determine. What matters is that the market only needed a hint of positive news to trigger a reversal in the heavy hedging that had built into the weekend.

As we wrote in our weekend report:

“Institutions also appear to be heavily hedged, which means that any signs of de-escalation could trigger a powerful snapback in markets as those hedges are unwound.”

Goldman Sachs is now expressing a similar view. Their desk strategist John Flood noted that hedge fund positioning could fuel a sharp equity rally if positive news emerges. According to Flood, speculative bulls are running extremely high gross exposure (~307%) while simultaneously maintaining large short positions in ETFs and index futures, creating the conditions for a right-tail upside move if sentiment shifts.

Importantly, short exposure remains historically elevated, which only increases the potential for sharp reflexive rallies when positioning begins to unwind.

And according to Ned Davis Research, their Sentiment Index remains on a buy signal, suggesting investor positioning is sufficiently defensive to support further upside if conditions stabilize.

Thus, we shouldn’t be surprised that the SPX reversed sharply on even a modest hint of positive news. With positioning heavily hedged and sentiment already defensive, the market was primed for a reflexive move higher.

Notably, the SPX narrowly missed our tactical reversal zone, ultimately finding buyers right at the 76.4% Fibonacci retracement level on Monday, where demand quickly stepped in to stabilize price.

The CPI release today was largely a non-event. While inflation did slow modestly from the prior month, the report did little to shift the broader narrative—particularly since the recent volatility in oil prices tied to the Iran conflict would not yet be reflected in the data.

The next key inflation report, PCE, will be released on Friday. Similar to CPI, it will not capture the most recent oil price volatility, though the median forecast is calling for a modest uptick. The bigger question is whether an increase in the report—combined with the growing risk of higher inflation prints in the months ahead—could begin to complicate the Fed’s expected rate-cut path. Time will tell, but the macro setup is becoming increasingly difficult to handicap.

In the meantime, the messy market environment persists, and our “do less” approach continues to be the correct posture. Choppy price action with little net progress tends to lead to performance drift, which is why we prefer to stay tactical at the edges rather than chase the middle of the range.

For now, that remains the plan until a clearer trend begins to emerge.

With that said, let’s turn to the charts.