Welcome back, everyone.
Plenty has happened since the last post, but we navigated quite well through the software selloff and the Iran War selloff. Now, the market has returned to all-time highs, and the negative sentiment, for the most part, has been wiped away. The war has yet to officially conclude, but everything going on points toward it. Iran has yet to come to terms with the US, while neither side wants to continue bombing. Both sides very well could, but this would only make the situation for Iran far worse. Knowing this, President Trump placed a blockade at the end of the strait and is requiring all ships passing through to report to the US. You see many claims online that this war has been an utter failure, but I don’t think so.
My goal is not to debate the rights and wrongs of either side, but solely to focus on the current state of the war. A ceasefire extension was announced earlier this week, which actually benefits the US and not Iran. The reason being that the blockade has forced Iran to sit on a stockpile of oil. A large portion of the revenue Iran makes relies on exporting oil. With this now blocked off, there is little to no revenue being generated. It doesn’t matter when you think Iran will make a deal; the fact that they are now cut off from generating income is devastating. This will lead to a breaking point where a deal must be made in order for Iran to avoid spiraling into an uncontrollable economic crisis.
Back when the US pulled out of the JCPOA, we put sanctions on Iran. A blockade, however, is far worse, as there is no means to import or export any goods. They have been nearly completely shut out from the entire world. Not only will unemployment skyrocket, but they could also be forced to raise prices at the pump, making gas unaffordable for most. Inflation will undoubtedly soar and leave Iran in an extremely tough spot. There is only so much pain a country can go through before the people start to turn against those in power. Just look at the US: current prices at the pump are over $4/gal across the country, and everyone blames Trump. Support for the current president will dwindle over time.
This alone will lead to a deal very soon, and it is the reason I think this war concluded even before the blockade was announced.
Add in the fact that countries are actually making deals with the US to purchase oil, and it becomes clear who is winning. As we discussed weeks ago, Iran is not a country that will bend the knee easily. They are willing to die for what they believe in far more than nearly any other country out there.
Militarily, I think the president is being very honest about the strikes made on Iran. They obliterated Iran’s Air Force and Navy, and many of the missiles they had are now spent. There really isn’t any telling how many missiles are left, but I think it’s safe to assume that well over 60-70% were used. If this wasn’t the case, then don’t you think the blockade would be considered a breach of the ceasefire?
The fact that Iran hasn’t called this a breach of the agreement just shows they want to avoid continuing the war. All they have against us is using the media to try to turn countries against the US, which is only working to some extent.
When we turn to the stock market, we can clearly see that large funds are agreeing with this and do believe the war is over. Trump commented on having zero knowledge of whether there are mines in the strait, yet oil rallied, and the S&P continued to hold. Selling stepped in yesterday on the news of Iran’s negotiator resigning, but this was a lackluster headline. None of that truly matters, as one person doesn’t solidify a deal being made. Iran goes into negotiations prepared ahead of time, knowing what will and will not be acceptable. The market took this news and quickly rallied right back up.
Taking all of this in, we will now look into the indexes and see where we currently stand.
Two weeks ago, I called out LEAPS on NVDA and TSLA. If you’re paying attention, then you have seen NVDA back above 200, while TSLA just sold off post-earnings. The long setup on NVDA remains robust, but TSLA will need more time. I don’t like the stock here after the recent report.
Soon, if selling starts to come in on the S&P, I will have a level to purchase calls with multi-month expirations to capitalize on the grind higher to 7500. At current levels, these contracts aren’t trading at attractive prices from a risk-to-reward perspective.
Let’s now break down where support levels are and where money is flowing.
Indexes (SPY, QQQ, IWM, DIA)
All four are firing off fresh long signals based on last week’s closing price. We need to take this with a grain of salt because this is one of the strongest 3-week periods we have seen in the market in a long time. Fair warning to anyone trying to buy at the highs, as the SPY and QQQ are quite far from the 10-week EMA.
We will use the 10-week EMA as a key support level to show us week-to-week trend health. The 21-week EMA below is a stronger support level, but it is hit much less frequently. My expectation over the next three weeks is to see selling back down toward the 10-week EMA to digest this large move we have seen. Very rarely will you get a strong rally like this and not see any selling to set a floor of support.
