Geopolitics Blows Up Market Rally

URGENT UPDATE–With the massive factors driving this potential market shift, we are going live to talk through this and show you exactly what we will be doing. Just after the open I’ll be joining John Boyer for a live Eye Opener market chat and we will sort through the madness and find a great trade. Join us here.

With trading in the markets, there are some weeks when the critical market-moving events that take place are those that are not marked on the calendar. This past week was a prime example of that. Headed into the week, top of mind for most investors were the trade negotiations between U.S. & Chinese trade officials. The talks ended on good terms and seemingly some progress had been made in creating a framework for a finalized deal. However, investors realize that we are a good ways off from a finalized deal, so the enthusiasm remained tempered. These talks ended up spanning a few days rather than only Monday and the market effect at the conclusion was mostly muted. Additionally, two key inflation reports were on most traders’ radar for last week as well. Both CPI & PPI for May came in cooler than expected so this provided further support for markets. As each of these three key events delivered satisfactory or good news, markets broadly had entered a mode where stocks were melting up and crawling higher. The indexes were left with a bit of an air pocket regarding planned events that could throw the market off track as the S&P 500 was within 1.5% of its all-time high intra-day on Thursday. In fact, at the market close on Thursday, all three major indexes were solidly in the green for the week. After the recent performance and quick run up higher, traders were certainly shifting into a phase where they were looking for a justified reason to sell off some stocks temporarily and this reason was delivered after the market close on Thursday as Israel launched a widespread missile strike against Iran. Quickly overnight the futures took a sharp turn in the red and markets opened a good bit lower than the previous day. During Friday’s trading investors did swoop in to buy stocks after the lower open, however, throughout the day as Iran retaliated and the risks of a wider regional conflict increased, most of the action into the close was selling as investors wanted to de-risk headed into the weekend. As of now, the true risk here is to energy markets and what may happen to the price of oil should supplies out of the Middle East become disrupted. As of now this has not happened, however should this occur, there could be a temporary spike in oil prices, which would hamper much of the recent progress that has been made in fighting inflation. While past geopolitical blowups have often resulted in being prime buying opportunities when it comes to stocks, this situation certainly warrants close attention moving forward.

After last week’s late week reversal resulting in all three major averages finishing decisively in the red for the week, I want to take stock of where markets stand from a technical perspective. Looking at the charts there is still a lot to really like from the technicals. The S&P 500 is still trading well above its 200-day moving average and even factoring in Friday’s sharp selling, the index is still continuing to make a nice series of higher highs and higher lows which is encouraging. Roughly midway through last week, the S&P 500’s Advance/ Decline line rallied and reached its all-time high before fading later in the week. This was a positive sign as it shows there is still strong buying pressure underwriting the recent rise in stocks. Where the S&P closed on Friday, this is nearly at a shorter term support level which dates back to the mid-May high. While this is not an incredibly strong support level, nonetheless, it would not be surprising to see stocks hold above this level until we get further developments on either geopolitics or U.S. trade policy. Regardless, after last week’s slight pullback, this is exactly the opportunity that many traders have been waiting for. The S&P 500 is no longer trading outside of the upper Keltner Channel and its RSI level has cooled substantially. After two weeks of essentially non-stop trading higher, traders were looking for a less overbought entry point for stocks. Now that stocks are not quite as technically overextended, I would expect to see some new buyers come back into the market.

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Key Events to Watch For

Geopolitics (Middle East Tensions)
May U.S. Retail Sales Report
June FOMC Meeting/ Rate Decision

After last week’s developments in the Middle East between Israel and Iran, you can bet that Wall St. is going to be keenly focused on any new events as this situation unfolds. Of course, for many reasons, most folks will be hoping for de-escalation instead of a new hot war ramping up. However, at this point it is uncertain if this can be avoided. The events in the coming days will likely be crucial to determine the path that this conflict takes. From the market’s perspective, of course the primary concern here is energy markets and any potential disruptions that could occur. As I mentioned above, should there be a meaningful disruption in oil flow from the Middle East into the global market we will likely see a quick and sharp move higher in energy prices which will have downstream effects on consumer prices. Here in the U.S., we have made a great deal of progress over the past year in fighting inflation, however, if we were to get an energy shock, we would likely see some of this progress become unwound.

Even though this upcoming week is shortened as markets will be closed on Thursday in observance of Juneteenth, there are a few macroeconomic reports due. The main one that our team is keeping our eye on will be Tuesday’s U.S. retail sales report from May. Per usual this report garners a lot of attention as it is one of the best indications about what consumers are actually doing with their wallets as opposed to simply just how they feel. Recently as soft data sharply deteriorated, hard data like retail sales held up, showing resilient strength which lent some support to bullish investors’ thesis that consumers were still spending despite lower sentiment. The expectation is that for May, retail sales will have fallen 0.6% from the previous month, however, if you were to strip out vehicle purchases, they are expected to have increased. If this report comes in as expected, this will likely not prove problematic for the market as it will show that ex-autos, consumers are still active in the economy and they are willing to still spend money.

After we digest the retail sales report from Tuesday, on Wednesday we will have to grapple with what could prove to be a very important event for this trading week and those to come. On Wednesday the Fed’s FOMC will conclude their two-day policy meeting and they will release their current monetary policy updates. Markets are virtually guaranteeing that the Fed will again opt to hold their rate policy at current levels after this meeting. This is evidenced by the CME’s FedWatch tool showing a 96.9% probability that the FOMC will decide to hold at this meeting. Despite little news being expected from the policy decision, there are likely going to be some market moving headlines resulting from other parts of this event. This is a Fed meeting where we will get an updated Summary of Economic Projections or SEP from each FOMC member. This SEP includes the much-discussed Fed ‘Dot Plot’ where each member charts out their best guess about the trajectory of Fed rate policy for the next few years. The most recent release of the dot plot showed most members on average were anticipating two rate cuts in 2025. However, with recent trade and geopolitical developments, this adds more layers of uncertainty for Fed officials as each could act as a future catalyst for inflation. Any updates to the Fed’s dot plot will be heavily scrutinized by markets. Also, as usual, the press conference held by Fed Chair Powell will draw many eyes as his commentary about the committee’s current outlook tends to move stocks.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,