Markets breathe amid geopolitical jitters: Oil volatility and elevated VIX keep traders skittish

Markets Take a Breath…But the Anxiety Remains.

Stocks spent much of Tuesday trying to stabilize after the recent bout of volatility and a test of the long term trendline driven by geopolitical tensions and surging energy prices.

At the end of the day – the Dow lost 85 pts, the S&P lost 25 pts, the Nasdaq gave back 1856 pts, the Russell rose 11 pts, the Transports added 243 pts, Equal Weight S&P added 10 pts while the Mag 7 lost 413 pts.

Notice that the Equal Weight S&P outperformed rising 10 pts vs. the broader S&P that lost 25 pts.

Strength yesterday was seen in Basic Materials + 1.9%, Energy +2%, Industrials + 0.6%, Utillities +0.7%, Healthcare and Financials were unchanged. Communications were the biggest losers down 1.4%, Tech down 0.6%, Consumer Discretionary lost 0.4%, Real Estate – 0.8% with Consumer Staples down 0.1%.

Disruptive Tech lost 2.7%, Cybersecurity lost 3%, Software down 4.3%, all while Semi’s were up 1.3%.

Oil and Exploration gained 3%, Big Pharma up 0.3%, Metal & Miners were up 3%, the Value Trade gained 0.25% while the Growth Trade lost 1%.

The contra trades gained and that makes some sense as the VIX remains elevated. The DOG gained 0.2%, the SH up 0.3%, the PSQ up 0.8%, while the VIXY added 2.1%.

But stabilization does not mean calm — it simply means investors are beginning to digest and analyze the news flow rather than just reacting to every headline.

And that’s an important distinction.

Today’s market is dominated by algos, Momo guys, and headline-driven flows – a result of posts on X, Reddit, LinkedIn, as well as news stories that get updated all day long that tends to cause the ‘smart logic algos’ (which is an oxymoron) to shoot first and ask questions later. That’s exactly what we saw again yesterday.

Early selling pressure gave way to bouts of buying as traders attempted to determine whether the recent surge in oil prices or the anxiety provoking geo-political headlines represent a temporary geopolitical spike or the beginning of a more sustained inflation risk.

For now — the market appears to be in the information-gathering mode.

And the information not only includes the daily geo-political data but also the latest eco data. Yesterday we got both Services and Manufacturing PMI’s, and they remain in the expansion zone. Manufacturing rose to 52.4 up from 51.6 while Services came in at 51.1 down from 51.7. Unit Labor Costs surged – now we did expect that, but we didn’t expect it to surge as much as it did…coming in at +4.4% - up from +2.8% and well above the +3.6% estimate. And that raises the temperature once again…..giving pause to the idea that rates HAVE to go lower. Just more information for investors to digest and analyze.

The VIX remains elevated, and that is also contributing to the ongoing tug of war in equities. This morning the VIX is down $1.10 or 4.1% leaving it at 25.85, a level that signals continued anxiety and nervousness in the market. Remember - When the VIX sits in the mid-20s, it tells you that traders and algos - that dominate daily trading - remain nervous and reactive.

As long as the VIX remains elevated, markets are likely to stay skittish and prone to sharp intraday moves as participants react to every new headline coming across the tape.

That said, long-term investors see these periods very differently. Elevated volatility tends to create opportunities – as strong companies get pulled lower (mispriced) along with the broader market. Something I have emphasized over and over again.

Bonds rallied a bit – after getting pummeled over the last week or two…. the TLT rose 0.6% while the TLH rose 0.3%. But this morning they are both a bit lower and that is sending the 10 yr yield up 4 bps at 4.29% while the 30-yr yield is up 3 bps at 4.87%.

Oil is pulling back after the panic spike – now down 14% since Monday…. This morning it is down 4% at $87. Trendline support is down at $71.85. Now look, energy remains the KEY here.

The panic buying we saw Sunday evening was the classic headline driven action…. traders reacting to the Trump headlines that pinpointed to a 48-hr. timeline to open the Strait. And then at 7 am – Trump drops the deadline telling us that the US and Iran are making headway and oil drops. And then Iran tells us that no such thing is happening and oil rallies…..but here is the skinny on that.

In my view – both sides are playing it close to the vest…neither side is telling the whole truth and nothing but the truth…. They are each positioning themselves to win…..And so the action will remain erratic. In the end – while the risk remains real, markets tend to overshoot initially and then rebalance as the picture becomes clearer. I have no reason to think this time is different.

Gold tested its long term trendline at $4,100 on Monday – down 27% off the high on a couple of ideas …..rising inflation, a rising dollar and a supposed end to this conflict.

Now, while it tested it, it bounced and this morning it is up $100 at $4,570 – kissing the intermediate trendline – which is now resistance. The headlines will continue to cause gold and everything else to thrash around….For now – my sense is that gold will remain in the $4100/$4600 trading range – but the weekend is coming (in 2 days) and as we know – so much can happen over the weekend that raises or lowers the temperature. Let’s just focus on what happens today and tomorrow before we start to predict what the weekend will be.

Bonds were relatively calm, with investors balancing geopolitical risk against inflation concerns from higher energy prices. The TLT and TLH both ended lower – down 0.4% and 0.3% respectively. The 10-yr treasury is now yielding 4.31% down from 4.42% on Monday while the 30 yr is yielding 4.88% down from 4.98% on Monday.

Remember – 4.5% on the 10 yr and 5% on the 30 yr are KEY levels that investors and markets watch very closely. If we kiss and then pierce those levels, markets will face longer term headwinds.

Now, What the bond market is telling us right now is important: Investors are not yet pricing in a major economic shock. Instead, the bigger debate is whether higher oil prices could slow the Fed’s timeline for rate cuts, particularly if energy starts bleeding into transportation, manufacturing and consumer prices.

You know how I feel – I do not see how the FED can justify ANY rate cut at the moment without shrinking the balance sheet and JJ didn’t say a word about shrinking the balance sheet last week. But that does not mean that Kevy Warsh will not – but we need to wait until he takes control.

European markets are in rally mode – all markets across the zone are up better than 1.5% on the idea that we will see an end to the middle east conflict. UK top line inflation remains anchored at a healthy 3% rate while core – ex food, energy, alcohol and tobacco remains pegged at 3.2% up from 3.1% in January.

US futures are surging. Trump tells us that the US and Iran are in negotiations right now. “They are talking to us and they are making sense!” and that is causing the algo’s to once again go all in…. Dow futures are up 445 pts, the S&P’s up 60 pts, the Nasdaq up 260 pts, while the Russell is up 28 pts.

None of this should surprise you — this is exactly how markets react to headlines. But remember, sentiment can change on a dime, which is precisely why you don’t get caught up in the daily drama.

If you sold stocks because you got nervous, now you’re faced with the challenge of getting back in — and all you’ve really done is create confusion for yourself. You sold when emotions were high and now you’re trying to figure out when it’s safe to return. That’s a tough game to play. If instead you sat tight, you’re fine. You stayed disciplined and avoided creating unnecessary stress for yourself. Remember, it is time IN the market, not TIMING the market.

The key for long-term investors is actually quite simple: understand what you own and why you own it. Focus on quality companies with real earnings and real cash flow.

And remember — periods of volatility often create opportunity, not disaster.

The S&P closed at 6,556 – down 25 points, leaving the index below the long-term trendline at 6,630 for the fourth straight day.

Now remember what we discussed last week. I said that if we broke that trendline (6,630) it would likely set the market up to test the 6,500 level — and that’s exactly what happened on Monday when the index traded down to 6,480.

That move represented about a 7.5% pullback from the January highs — and once again, that is still well within the boundaries of normal market trading. Corrections like this happen all the time.

Now this morning futures are stronger, which means we could very well bust up through that trendline resistance right at the opening bell.

But the real question today is simple: Can we hold it? And more importantly — can we close above it? Because whether that happens will depend less on fundamentals and more on the rhetoric coming out of the White House… and the reactions on X, Reddit, and everywhere else where today’s algos go hunting for the next headline.

Sunday morning bran muffins

Last Sunday – I made my homemade bran muffins and posted a picture on X. I have gotten a couple of requests for the recipe – so here you go.

You need: Total Cereal, flour, dark brown sugar, baking powder, salt, one egg, whole milk, vanilla, cinnamon and vegetable oil, (you can use melted butter in place of the vegetable oil).

Set your oven to 400 degrees.

So, start by putting 2 cups of Total in a bowl, add in 1 ½ c of whole milk, one egg, ¼ c of vegetable oil – let it sit for 5 mins or so.

In a separate bowl – you need 1 ½ c of flour, ½ c of dark brown sugar, ¼ tsp salt, 1 tbsp. of baking powder, ½ tsp cinnamon. Mix the dry ingredients with a fork.

Ok – now I put the cereal mixture in the blender and blend it – quick – like 15 seconds or so.

Then I pour it back into the bowl and add the bowl of dry ingredients. Mix well.

Then I spray the muffin pan with Pam and add the bran mix. Bang it on the counter to remove any air bubbles and then place it in the middle rack.

15 mins later you should have a set of beautiful bran muffins – but use a toothpick to make sure.

Serve immediately with butter and a big glass of cold milk.