Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: Bearish

We’ve said many times that this is a stock-picker’s market. Most stocks and the index are falling, which means it requires precision and market timing to pick the right stocks to buy.

Many of the stocks recommended in our healthcare picks continue to rally. One particular stock that stands out is Tenet Healthcare (THC). At the time, we wrote that “a retest to the 50-day moving average should be buyable.” The stock did exactly that and gapped up massively on strong earnings results. It is up over 30% in under two weeks.

Amid the broader market pullback, healthcare stocks have held up well, along with financials and real estate. These are the sectors you want to own right now as beneficiaries of the ongoing market rotation.

Tech earnings

For years, a simple rule governed Wall Street: buy tech giants, mention “AI,” and watch stock prices rise. The Mag 7 lifted the entire stock market on nothing more than a promise that AI would usher in a new era of productivity.

The latest earnings from Google and Tesla tell us we’ve officially entered a new, trickier phase of the cycle. We are moving away from pure excitement around AI’s potential, and into the harsh reality of what it actually costs to build.

On the surface, Google’s earnings results beat all expectations. Sales were strong and profit numbers eye-popping, but look under the hood: debt has doubled in six months, and spending exceeded generated cash flow.

For the first time, Google’s AI capital expenditure reached over $200B/year. And yet they’re still losing to Anthropic and OpenAI (that’s Claude and ChatGPT). On the conference call, CEO Sundar Pichai sheepishly admitted that staying at the frontier is not easy. That was not the message investors wanted to hear; the stock sold off -7% on the day.

Tesla presented a similar theme. Sales rose a lot, but they also spent more money than they raked in. For months, Elon Musk has been hyping up self-driving Robotaxis and Optimus humanoid robots. But these ambiguous moonshots are still in development rather than generating real cash. Building tomorrow’s autonomous tech and robotics requires massive spending today.

TSLA shares are trading down -17% for the week.

Intel on Friday fared no better. Earnings beat expectations. Capital expenditures for 2026 bumped up from $18B to $20B. 2027 expected to be “significantly higher”. The stock sold off heavily on the day.

In any major technological revolution, the hype phase is followed by heavy construction. That’s where we are now. This phase is the toughest for stock prices because excitement meets cost reality. Tech giants are spending astronomical amounts on infrastructure out of fear of being left behind. Cash flow gets squeezed because the spending is immediate, but monetization is later.

So Wall Street’s favorite “AI Trade” and “Mag 7 Trade” are no longer a simple rising tide that lifts all boats. Investors are starting to ask the tough question: When will all this spending turn into real, lasting profit? In our view, not anytime soon.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Iran war continues

• Enter the Houthis

• Higher interest rates

• Technical signals turn bearish

• Short-term shorts

• Our portfolio (we sold stocks)

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: HOLD

We called the dead-cat bounce last week. So far, we’ve been right to be bearish chip stocks. The rotation out of chip stocks (SOXX) accelerated to the downside, violently breaking below the 50-day average on its way to the 100-day.

The AI trade is imploding. Hope is not a good investment strategy. To be a good investor, one must understand the market context and decipher price action. If you’re still holding Nasdaq (QQQ) or semiconductors/AI stocks, you need to revisit your portfolio!

Non-tech stocks working

While the tech complex implodes, consumer and finance stocks have been rebounding sharply. Here are some of the picks we recommended over the last few weeks:

DAVE, a tiny digital banking company, continues to rally past our $400 target. This stock is up 50% since we recommended it, and a whopping 967% over the past two years. We still have “runners” left in the trade.

Travelers (TRV) and Chubb (CB) insurance companies were given as breakout ideas in our Jun 28 post. Financial stocks have been doing excellently lately and are a destination for capital fleeing the semiconductor trade.

Bloomin (BLMN) and Toast (TOST), two restaurant related ideas, not only withstood the tech selloff of the past few weeks. They are actually pressing up against the highs and poised to break out. Consumers remain resilient and spending is about to recover strongly:

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• What fueled the tech selloff?

• Cheap models are a game changer

• Company specific news fueling the selloff

• Technical analysis

• Stock picks and our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Insurance stocks have broken out strongly since we recommended them in our Jun 28 letter. Many of these stocks are up 8% to 10% in just two weeks, beneficiaries of the ongoing rotation out of chip and tech stocks.

The market rotation continues with downside in chip stocks and a surprising rebound in Mag 7 stocks. The SK Hynix ADR issuance increases the supply of overhyped chip stocks in the marketplace.

This is a stock picker’s market. Being able to pick winning stocks carries outsized rewards because not all stocks are going up simultaneously.

Chip rotation

The chip rotation continues in full force. Chip stocks and AI infrastructure providers have declined precipitously and are now bouncing slightly. For example, Sandisk (a major memory chip maker) fell -37% from highs.

So where is all that speculative money flowing to instead? A variety of sectors, but most notably Biotech, Pharmaceuticals, Insurance, and Software. Even Bitcoin and Chinese stocks are getting a lift as investors seek out diversification in risky or uncorrelated asset classes.

We were able to capture some of these breakouts in our weekly stock picks.

The question everyone wants to know is: Do chips have further to fall? Possibly. As the daily chart below shows, SOXX bounced off the 50-day moving average. It is currently in a dead-cat bounce, driven by excitement for the SK Hynix ADR issuance.

Technically, due to the nature of leverage and investor psychology, it’s highly unlikely SOXX retests the all-time high anytime soon. Fundamentally, investors are wary of companies increasing AI infrastructure spending, which dampens the demand for chips.

Last week we talked about the possibility of SOXX dropping to the 100-day or 200-day moving average after a historic over-extension. It’s also possible that it consolidates sideways for a period of time. Either way, we won’t be buying SOXX until we see some better digestion.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Iran war restarting

• More Meta updates

• Technical analysis: Tech sector

• 3 stock picks and our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Our trades from the past few weeks are working well: Insurance stocks continue their breakout, while consumer stocks (airlines, restaurants, and retail segments) are all blasting off to higher highs.

DAVE, the fintech company we picked in our June 14 letter, has reached its price target of $400. From our entry price of $293, this is a 37% move in two weeks. Reward-to-risk ratio of 3:1. We had taken partial profits along the way, and are now selling most of the stake, leaving a tiny portion for further upside (“runners”).

As we’ve highlighted in the past few weeks, we are in the midst of a bull market rally and rotation into non-tech parts of the market. This is why cyclical stocks like DAVE are breaking out to new highs. We continue to find excellent trade opportunities to capitalize on this trend.

Another cloud competitor?

On Wednesday, Bloomberg ran an article that suggested Meta (parent company of Facebook and Instagram) is starting a cloud business to rent out its excess computing capacity. Investors read this announcement as a signal that they have too many data centers, so CEO Mark Zuckerberg is pausing capital spending. As we’ve written before, Meta has a spending addiction when it comes to AI infrastructure. That’s why META stock shot up 10% on the day the article was published.

Less spending is good for all Mag 7 since the market extrapolated the cuts to other cloud providers (as we expected they would). On the flip side, less spending means less revenue for data center providers and chip makers, in particular the memory chip makers (chart below). This sparked the selloff in tech stocks that started on Weds and continued into Thurs:

Let us first point out that the reaction may have been exaggerated. Meta is opportunistically taking advantage of current high compute prices. This does not mean they stop building data centers, as their long-term strategy is centered around growth in AI. It also does not mean they stop building their internal AI model, “Muse”.

We’ve been calling for Mag 7 to pull back on AI spending, but this is not it. Unfortunately, the spending addiction continues. If anything, it proves that demand for underlying compute is still red hot.

So what should we take away from this? Recall Encroachment Theory, which we started writing about in March 2025. Mag 7 used to have separate monopolies, but now they are all converging on the same turf. Competition is heating up as AI increasingly proves to be undifferentiated.

Worse yet, brand new competitors are entering the fray. Oracle is infamously transitioning into an AI cloud provider (look how their stock price is performing). Neoclouds like CoreWeave and Nebius came to market on the premise that demand for AI data centers would outstrip supply for years. SpaceX is building data centers in space. And now, Meta wants to compete for the same customers.

Every seller of excess capacity makes it harder for the next data center/cloud company to justify a premium price. What was supposedly scarce is being answered with new supply. That’s how supply and demand work. The dot-com bubble followed a similar arc: first excess demand for a new technology, met by new supply, and then oversupply.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Healthcare stock picks

• Chip stocks crashing

• Changes to our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

In our Apr 5 post, we recommended Marvell (MRVL) as a trade. At the time, the stock was breaking out of a cup-and-handle pattern with a positive news catalyst. From our entry price of $107, the stock tripled to over $320.

With the AI theme faltering and an ongoing rotation out of tech (as explained in the Paid section), the weekly chart now shows a large bearish engulfing candle. We took partial profits along the way up, and will now be exiting the remainder of the position.

Picking stocks in hot thematic sectors, with a recognizable technical pattern and a positive risk/reward ratio, can produce explosive results. Not all our trades will look like this, of course. This also demonstrates the importance of using trailing stops to capture as much upside as possible.

Just to show we’re not cherry-picking: In the same Apr 5th post, we also recommended CSX (+15%) and TJX (stopped out). More recent recommendations on SHY (levered), VSXY (+12%), DAVE (+20%), and short Gold (+8%) are also performing well.

To get more trade recommendations, consider upgrading to paid subscriber status.

The rest of this article is for premium members. Upgrade now to continue reading:

• Chip stocks crashing

• Bear market for Mag 7

• Evidence of rotation

• Economic data

• Bitcoin down

• Technical analysis

• New trade ideas

• Our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

The two short-term trades we gave last week, VSXY and DAVE, are in the money. Even on days when the SPX was weak, these stocks held their breakout levels and made new highs. We would recommend selling small portions along the way as it approaches target price.

The market is very clearly signaling a rotation out of concentrated AI stocks and into cyclicals and consumer stocks. In today’s post, we explain this phenomenon as well as highlight a few stock ideas to capitalize on this broadening bull market.

Last week we correctly called the end of the SPX pullback and switched to bullish. All based on our fundamental outlook and technical analysis.

Fed chair Warsh

This week we had the first FOMC meeting chaired by Kevin Warsh. Interest rates were kept unchanged. Investors widely regarded the meeting to be hawkish (i.e., leaning toward rate hikes) causing markets to sell off. We think this was an overreaction.

In the Fed members’ projections, inflation forecasts were higher, as were rate hikes. What was previously a cut has now turned into a hike (image below). Sounds bad; however, let’s not forget that half of the members still forecast interest rates flat or lower. Warsh himself abstained from forecasting, but he certainly would’ve voted lower — forming a majority in favor of no hikes.

When you look more closely at the Fed members’ forecasts, they are also expecting rate cuts in 2027. This does not look to us like a unanimous Fed hell-bent on raising rates.

“…inflation has been running well ahead of the Fed’s long-stated inflation goal of 2%. That’s been going on for more than five years.”

-Kevin Warsh, FOMC Presser

Sure, Warsh spent a lot of the meeting emphasizing inflation, as evidenced by the quote above. But what people forget is that Warsh believes in trimmed mean inflation (i.e., excluding the extreme components) rather than official CPI. Trimmed mean is only around 2.3% right now; pretty close to the stated goal of 2%.

It’s no coincidence that Warsh proposed an overhaul of Fed internal processes, including data sources and the measurement of inflation. He wants to tamp down inflation by changing the definition. What better way to kill two birds with one stone (cut rates while keeping inflation low and jobs high)?

Recall Warsh’s belief that inflation is structurally falling due to AI productivity. That allows the Fed to cut rates regardless of the data.

Here are some other quotes that belie Warsh’s dovish views:

• “I don’t believe we have a cruel choice.” Meaning they don’t have to choose between inflation and jobs. They can have both.

• “There was one proposal on the table. There was no discussion of any other proposals.” The Fed only considered holding rates steady, and did not consider hiking.

• “The price of oil… does not have first-order consequences to what we’re doing.” They are looking past the short-term spike in oil prices, not assuming it will impact inflation.

• “If I look at the housing markets as one example… broadly I would say there Fed policy appears to be somewhat restrictive.” High interest rates are hurting the housing market.

Overall, Warsh was trying to build credibility on inflation control without resorting to rate hikes. That’s good news for investors because it keeps long-term interest rates in check. Otherwise, bond markets would panic, which would ironically cause more damage.

The only concern we had was his intent to get rid of forecasting. Warsh thinks the market should focus less on Fed messaging and more on economic data. He wants to leave the responsibility of interpreting data to the markets. Therefore, he wants the Fed to give as little guidance as possible.

“…financial markets perform best when they react to incoming data… The more that markets are paying attention to what’s happening in the real economy, deciding what’s good data and what’s less good data, the more financial markets can price what they believe is the most likely and what are the tail risks.”
-Kevin Warsh, FOMC Presser

When markets face uncertainty, it results in higher volatility. Long-term interest rates shift higher to reflect the uncertainty. That’s bad for stocks.

Ultimately, we think the Fed will pause interest rates for the rest of 2026. We think it unlikely that Warsh, as Trump’s appointee, would allow a hike. But the market was used to being spoon-fed (pun unintended) outlooks from the Fed, so the change in stance was a bit jarring for markets.

Warsh was given every opportunity to signal future rate hikes, but he didn’t. We don’t think hikes are a real consideration for him at this time. In other words, the market overreacted to the meeting. We continue to think short-term interest rates will come down — in the next section, we’ll structure a trade to take advantage of this view.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• How to trade interest rates

• Iran deal favors Iran

• Technical analysis

• Sector rotation under way

• Our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Markets rallied sharply on Trump’s announcement of a forthcoming deal with Iran. Oil prices have already been in a steady downtrend of late, barely reacting to confrontation. This week’s news sent oil straight down.

And yet the consensus of Wall Street analysts remains the same: Oil to $200, unchecked inflation, possible global recession.

Readers of MktContext know that we have been bullish on the Iran deal, bearish on inflation, and bullish on the economy. By understanding this context, we were able to buy SPX near the lows in early April. We’ve been riding the bull ever since. We are still holding and expecting new highs.

Today’s topics: Iran deal, gold trade update, tech red flags, inflation, positioning unwind, 2 stock picks.

Iran deal

Markets rallied sharply on Trump’s announcement of a forthcoming deal with Iran. He canceled a scheduled strike (“we’ll hit Iran very hard tonight!”) and cited rapid progress on a memorandum of understanding (MOU).

As is often the case, the language used by the President was vague. Agreement “pretty much wrapped up.” Documents at a “fairly final stage.” No concrete deadline given.

Iranian news media denied approval of the final MOU text; however, the Foreign Minister Abbas Araghchi made a statement that the MOU has “never been closer”. It appears that authority is still scattered over there.

Does this mean we should doubt the deal? No. The terms of the agreement might not be as expected (US likely made concessions, especially on nuclear) but the deal will be concluded one way or another. Threats of bombings are nothing more than pressure tactics to nudge the opposition to sign.

The key dynamic to understand is incentives. Trump can’t actively initiate war without congressional approval (which will likely fail) and he is hamstrung by the upcoming midterm elections. Inviting retaliation at this stage of the conflict is a losing proposition.

Oil prices have been in a downtrend well before this news hit the tape. The concerns around oilfield shutdowns, long espoused by Wall Street analysts, appear unfounded. In actuality, oil demand has shrunk and supply has circumvented the naval blockade.

Every day there are more reports of tankers transiting the Strait despite the ongoing blockade (image below). Some are paying Iran’s toll. Some are guided by CENTCOM. Some are “shadow fleet” avoiding detection. Regardless of how, oil is flowing. A deal with Iran, signed or not, is merely a sideshow.

Gold short

The gold short trade we gave last week is in the money. Due to the sharp drop in price and spike in volatility, the put options paid off more lucratively than outright GLD shorts.

Note the similarities with the oil chart from earlier.

If you haven’t already, we would recommend taking profit on the bulk of this position, leaving a small runner for further downside. The reason is because interest rates have stalled their rise, oil prices are falling, and the recent positioning unwind may soon be over (more on that later).

It’s significant that gold is falling alongside stocks. Gold is supposed to be the safe haven asset, the defensive holding that everyone flocks to in times of stress. But right now, investors are forced to raise cash. And that creates an entirely different dynamic.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Red flag share issuances

• Inflation still tame

• Positioning unwind

• Technicals and our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: HOLD

After 9 weeks of non-stop rallying, the S&P finally had the long-awaited pullback.

The reason for the pullback? A very strong jobs report (non-farm payrolls). Good news is bad news when it causes expectations for rate hikes to jump dramatically. That’s bad for stocks.

We have been warning about the over-extended rally. In “Fever Break; Blow-Off Top Formed” we wrote:

The Nasdaq is now 10 ATR above its 50-day moving average. That is in very, very extended territory. A pullback could knock this market off its stilts at any moment. All it would take is a piece of negative news, like the DeepSeek announcement from last year or a Fed hike announcement.

A selloff could be deep if there’s no buying support at current price levels. In Wall St parlance, we call this an “air pocket”.

The strong jobs print presages a possible Fed hike announcement. That’s what spooked investors on Friday.

So what comes next? Does it rally back sharply or is this a major turning point in the market? At MktContext, we study the underlying factors and “market context” to answer these questions.

Today’s topics: coal trade, tariffs, layoffs, bitcoin and gold crash, our portfolio.

Trump supports coal

Trump announced $700M of federal funding to support 13 coal plants across the US. The funds would be used to restart a Maryland plant and build new plants in Alaska and West Virginia — the first new US coal plants since 2013. It also goes toward constructing a coal export terminal in Oakland, California.

Trump is a longtime supporter of coal. He’s previously delayed coal plants from retirement and relaxed coal pollution standards. Putting aside obvious political motivations, the country needs the energy to meet surging power demands from AI and electric vehicles.

Coal is a reliable but polluting energy that’s long been shrinking amid environmental regulations. While we support environmentalism, shunning coal is not the way to do it. Instead, there need to be incentives to “clean” coal emissions so that the US can diversify its sources of energy to include coal (along with solar, wind, nat gas, and nuclear).

Diversification helps prevent blackouts during extreme weather. It also helps withstand commodity shocks due to war. And as mentioned, we need it dearly for AI data centers. A properly diversified energy program prevents shortages like those experienced recently in Europe and Asia.

If part of the funding goes toward upgrading/modernizing coal plants, for example retrofitting with carbon capture or scrubbers, this will go a long way towards reducing toxic emissions. Ironically, it is China that is the world leader in clean coal technology due to rapid scaling and decades of innovation.

We think coal stocks are undervalued and should benefit from federal capital injection. Institutional investors are frequently restricted from owning coal stocks due to bad publicity; retail investors have the edge here.

COAL is the ETF that contains many of these stocks, but trading volume for this ETF appears thin. Individual coal-producing companies include CNR, BTU, ARLP, HNRG. Be sure to distinguish between thermal coal (burned for energy) vs met coal (used for steelmaking).

Here’s how we would play them: Several of these stocks are forming flag or multi-month consolidation patterns on the weekly charts. A flag is simply an uptrend (the flagpole) followed by a consolidation range, and ultimately the breakout. There is often a high probability/high payoff trade when these stocks break out of resistance. Alternatively, you can buy them early at the lower part of the “handle”, but the odds of failure will be higher.

There are also utility companies with coal-fed plants, such as DTE (40% coal), AEP (30% coal), SO (30% coal), LNT (20% coal) though many of these operators are actively retiring coal assets.

(Not financial advice; always do your own diligence.)

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

Share issuances are a red flag

An important development happened this week in Mag7 land. Google is issuing shares, its first major equity raise since its IPO two decades ago. A share issuance involves creating new shares of its stock out of thin air, which the company sells to investors in order to raise funds. The funds can be used for anything, but in this case it’s almost certainly for building data centers.

Shortly after, Meta also unofficially considered an equity issuance to finance its aggressive AI buildout. Meta is known for overspending on big money-losing visionary projects like the Metaverse. So for them to raise funds is a big problem. Given the negative stock reaction to the announcement, we think Meta will reconsider this issuance.

There is tons of academic research linking equity issuances to underperformance in stock returns. Companies with higher shares outstanding or bigger funding requirements also demonstrate weaker returns. This is empirical fact.

Moreover, they go from buyers of their own stock to sellers. It’s a simple supply/demand equation. More demand for shares = stock prices go up. More supply of shares = stock prices go down. We’ve discussed this problem in past posts:

“The other issue with diverting all cash flow to capex is it leaves little to buy back their own stock with. Given the copious amounts of idle cash they had before, stock buybacks were previously a major source of buying support. No buybacks means no price support. This explains the Mag 7’s awful stock performance in recent times.”

-From AI Capex Overheated, Feb 22, 2026

Seeing Mag7 issue shares is extra problematic. These companies have historically been cash-rich due to their lucrative asset-light business models (meaning it requires very little funding to grow). It highlights the shift from cash-generative to cash-burning entities all because of the enormous spending requirements of the AI boom. This makes them decidedly less valuable.

It doesn’t mean we immediately short the Mag7 companies. But one by one, the pillars of fundamental support for these stocks are eroding, until there is only air underneath them. They are sowing the seeds of their own implosion later down the road.

The rest of this article is for premium members. Upgrade now to continue reading:

• Tariffs again?

• Layoffs in the economic data

• Bitcoin and gold crashing

• Our portfolio + technical analysis

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: HOLD

We invested 100% of our portfolio into US equities in early April. We’ve held it through the entirety of this incredible rally of nearly 15% in two months:

Many pundits were stubbornly holding cash and sat out the majority of this rally. Bearish investor sentiment was, and continues to be, elevated even though this bull market is one of the strongest on record.

What gave us the conviction to buy at the bottom and hold to all-time highs? Understanding the context of the current market environment, as well as the daily price action and positioning of other market participants. These are critical parts of market timing.

Today’s topics: Iran/US deal, Meta’s new business model, AI compute costs, IPO signals end of bull market, software rebound. Plus, new trade made in the portfolio!

Iran/US deal

As we predicted last week, Iran/US talks are evolving rapidly. The two parties reached a deal to extend the ceasefire by 60 days while they start formal nuclear talks. The naval blockade in Hormuz would be lifted and the Strait cleared of tolls or harassment. Iran would have to remove all naval mines within 30 days.

Here’s what’s up for discussion in the subsequent nuclear talks: Stop uranium enrichment and give up their stockpile of highly enriched uranium. Commit to UN inspections and never pursue a nuclear weapon again. In return, the US would gradually lift sanctions and release billions in frozen assets.

The ultimate goal is a comprehensive deal that trades Iran nuclear ambitions for resumption of global shipping. The catch is this: The deal is not yet signed by Trump. Major gaps remain — Iran wants a shorter uranium ban, and resisted giving up its stockpile.

Still, we think a deal is more likely than not because both are aligned in incentives. Both sides benefit from ceasefire (Iran for its survival, Trump for domestic politics). The hard part of finding agreement is done; now it’s just about price.

The timeline and process are largely resembling the China tariff negotiations in 2025. Once both sides realize it is mutually beneficial to cease fire, then there’s no reason to expect subsequent flare-ups. Extensions are credible, regardless of how wide the gap. And by the time the final deal is announced, the market will have already moved past it.

There is a strong case for a sell-the-news event upon announcement of the final deal. Markets have long anticipated a deal and already priced in the reopening. Stock indices are near highs while oil prices have pulled back. Once the initial excitement fades, traders take profit. This is what causes “sell-the-news” events.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Meta’s new business model

• AI compute is getting expensive

• IPO signals end of bull market

• Software rebound continues

• Our portfolio + New trade alert!

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext. We study the US economy and time the stock market.

Current market timer: HOLD

For the past two weeks we've said stocks are over-extended and due for a pullback. Our shorts have been correct, however pullbacks have been shallow and dips are being bought aggressively.

It is very difficult to be bearish in this environment. The trend is extremely strong, for all the reasons we've been highlighting in recent posts. Instead of fighting the trend, listen to what the market and price signals are telling you.

Every investor wants to know if this is the top. To answer that, we need to look at the underlying drivers of the stock market…

Today’s topics: Nvidia earnings, AI demand, oil prices, interest rates, market outlook, our portfolio.

Nvidia earnings

Nvidia reported its quarterly earnings. Many investors expected a strong reaction but as usual, it disappointed and the stock fell 2%. In fact, it hasn’t had a strong post-earnings rise since 2022. That’s because traders almost always overhype the event. For those who are able to day-trade, it has become a reliable and highly profitable short the day after results are released.

Below was the options positioning immediately before the earnings event. Demand for calls (bullish bets) was at max while puts were at zero. Demonstrating extreme bullish sentiment and expectation that is nearly impossible to beat. Nvidia has been at the center of the AI boom; investors were already assuming strong growth. Because of that, it is harder for the company to surprise the market.

Whereas NVDA stock itself didn’t perform well, other companies connected to Nvidia did very well. These are often called “picks and shovels” businesses. They supply parts used in Nvidia systems. Memory companies stood out, with stocks up 6-10% in a single day. Other parts manufacturers did this:

A key reason for this reaction comes from Nvidia’s next gen rack system, called Rubin. Rubin will multiply the memory and componentry needs of AI data centers — some by as much as 400%. That’s why component producers (memory, circuit boards, power systems, cooling systems) continue to skyrocket.

On the other hand, Nvidia’s own chips are making up a smaller and smaller part of the system. And its profit margins are shrinking as well. That’s why NVDA stock was down, yet the AI ecosystem is simultaneously thriving. Demand for advanced systems is still increasing. The AI bubble is still growing.

We’ve highlighted this dynamic many times in the past. This is how capital cycles for new technologies naturally progress. Bottlenecks shift to new areas like CPUs, memory, and substrates. That is how we identify the next group of stocks with explosive growth.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• AI demand is strong, even if NVDA weak

• Oil prices and interest rates falling

• Stock market outlook: Where we go from here

• Our trades and portfolio

Claim your free trial by clicking the button below!

Read more

To the global macro investor, China has long been a complex thesis of raw scale, intense policy interventions, and structurally evolving capital cycles. For decades, the playbook was simple: short the Renminbi during capital outflows, go long on copper and iron ore during infrastructure-driven debt cycles, and buy tech monopolies as the consumer market digitized.

Yet, as the state pivots away from old-school real estate leverage toward a "productivity-centric" model, the old metrics are cracking. The State Council's GDP growth target—adjusted to a flexible 4.5% to 5% range—confirms that the era of blind, double-digit expansion is over. Policymakers are actively seeking a structural rebalance, defending a basic equilibrium in the balance of payments while attempting to manage domestic price recoveries.

Read more

Welcome back to MktContext. We time the stock market.

Current market timer: HOLD

SPX just closed its 7th positive week in a row. Rallies of this speed and magnitude are often unstable. We are fully invested riding the bull wave, but recognizing that a pullback will be inevitable at some point.

This week we saw signs of exhaustion in the rally. Technical signals point to an interim peak and imminent selling to come. If our theory is correct, then a brief pullback could occur as early as next week.

We’ve been hearing from many investors that this market has been incredibly painful. Some were left sitting out the V-shape rally, others have been trying to time the market peak and getting run over. Lacking the proper framework for identifying turning points can be debilitating in this type of environment.

Today’s topics: Market is peaking, Xi-Trump meeting, inflation, our portfolio.

Technical analysis

The torrid rally in tech stocks continued this week, culminating in a blow-off top. There were several bullish news catalysts this week:

• US clears sale of Nvidia H200 chips to China

• Cisco (CSCO) earnings and pivot to AI

• Chip startup Cerebrus’ explosive IPO debut

• AMD’s strategic stake in Marvell

By the end of the week, positive news of Trump and Xi’s meeting in Beijing was overshadowed by a sharp gap-down/selloff on Friday. Traders had already priced in the good news earlier in the week, leading to a sell the news reaction (wherein good news is met with selling). It is often a sign of exhaustion and imminent reversal; exactly what you’d expect at a peak.

The result is a large spinning top candlestick on the weekly SPX chart after 6 straight weeks of green. This candle usually indicates indecision or a rejection of a key level — in this case the 7500 price level and major Fibonacci extension we mentioned last week:

Tops are often messy and difficult to time. However, due to the extent of this short-squeeze rally, a pullback is inevitable and a bit overdue. In the rest of this report, we discuss whether this is the start of a bear market or whether the rally can continue after a brief pause…

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

Short squeeze continues…

The rest of this article is for premium members. Upgrade now to continue reading:

• When will the short squeeze end?

• Xi-Trump summit changes nothing

• Hot inflation print

• Our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: HOLD

The market continues a relentless rally but looks due for a pullback. In times like these, our job is to ride the bull for as long as possible and not attempt to time the peak.

This week we got blow-out earnings results from AMD, SMCI, HUT, ALAB, and other AI-related names.

Chip makers are entering a blow-off top phase. Can this nosebleed rally continue?

Today’s topics: Nosebleed Nasdaq, volatility analysis, bifurcated consumer, AI agents, software rebound, our portfolio.

Nosebleed Nasdaq

The Nasdaq is on a tear, like nothing we’ve ever seen. It’s up 26% from the lows a month ago. It touched 3.5 standard deviations above its 200-day moving average. A statistical anomaly that hasn’t happened since — you guessed it — the dot com bubble.

It feels like QQQ has been gapping up almost every day, with some of those gaps left unfilled. Here at MktContext we tend to think “gaps get filled” meaning the stock will retrace the air pockets left behind. That could happen soon as the market needs to consolidate gains.

What’s driving this rally? Mag 7 is languishing (on a relative basis) even as QQQ breaks highs. That means this rally is not led by the most concentrated bunch. It is also not led by equal-weighted QQQ, which means there's no breadth to this rally.

McClellan Oscillator for QQQ is declining, confirming the lack of breadth:

It appears the rally is carried by a select few AI supply chain companies. GPUs, CPUs, networking, hardware, electronic circuitry, things of that nature.

This doesn't mean we immediately sell our holdings or go short. There are tactical ways to capture profits (we’ll discuss one in the paid section) but blow-off tops can continue longer than expected. Dips are still being aggressively bought in this tape. Don't fight the trend.

On Thurs we saw the first sign of a potential change in character as the index and chip stocks sold off mid-day. However, they gapped up again on Fri and were bought all day. Timing tops is hard.

After a rally of this magnitude, a pullback would be healthy and expected. But we don’t think it’ll be a deep selloff. Watch the chips, memory, and opto-electronics stocks for signs of what the leaders are doing.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Volatility analysis

• Bifurcated consumer

• AI agents and the new bottleneck

• Software stocks rebound

• Our portfolio

Claim your free trial by clicking the button below!

Read more

SPX just experienced one of the most dramatic rebounds in history. It went from oversold to overbought in just 12 days. The speed of this move has left many doubting the rally.

In this report we discuss where the strength is coming from and how investors are positioned for the rally. We discuss our current portfolio, hot sectors we’re watching, and why we remain bullish on the market.

Today’s topics: Rise of retail investors, power grid investments, the next stage of Iran war, UAE exits OPEC, positioning, our portfolio.

Rise of retail investors

A major bank published research about the rise of retail investors. Retail (defined as any individual person who invests their own money) now make up 20% of trading volumes, rivaling institutions. Retail are no longer considered “dumb money” as they were in the past, thanks to widespread access to information and commercial trading platforms. Here are a few key findings from the report:

• Retail are often more nimble than institutions in entering or exiting trends. They were heavily involved in the Gold/Silver bubble in Jan, and provided strong support for the rally.

• Retail rose to prominence during Covid when people had time on their hands and stimulus checks to invest. Many thought this would be transitory, but instead it has become a structural force in markets.

• Access to information and AI has been a game-changer for retail. It is easier than ever to form an opinion on a stock and act on it. Trading systems are accessible even on phones, at MUCH lower cost.

• Social media can reveal where retail is moving next, as they are often vocal about trading intentions. They follow influencers for ideas. Highly mentioned stocks tend to perform well over a 20-day horizon (momentum effect). This has led to meme rallies seen in recent months.

• In large cap stocks, retail sentiment is a mean reversion signal. Stocks with trending sentiment over 5 days tend to underperform. This highlights dislocations where investors are overexposed, leading to corrections.

It is therefore possible to exploit retail herding behavior to improve our edge.

Consider the recent Iran-driven selloff in stocks. Whereas institutions capitulated (sold) early in March, retail held up for several weeks longer and only capitulated at the end of March, coinciding with the exact bottom in SPX. This was the key reversal signal.

As you can see, this cohort is sizeable enough to move markets. That means they should not be ignored. Watch what retail is buying, but also when they are selling. It is useful for market timing purposes.

It is also our belief that this structural shift is eroding the “Value Investing” edge (a.k.a. Warren Buffett-style). Retail participants prefer narratives and momentum over fundamentals. That means price can remain decoupled from fundamentals for extended periods.

When positioning diverges too far from fundamentals, momentum will crash. This is why modern stock markets oscillate between two speeds: Feverish momentum chasing or sharp selloffs. Identifying these turning points is what makes market timing work.

So what is Retail thinking now? After the historic drop for March, purchases are just starting to rebound now and still below average. Due to the speed of the recovery in SPX, many investors have been scared to chase the market higher and are stuck in cash. That means there is fuel left to propel the market higher.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Power grid investments

• The next stage of Iran war: Economic fury

• UAE exits OPEC

• Positioning and Our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

Is the war over? After a 10% decline, the SPX has already recovered back above all-time highs. And yet investors have been skeptical the entire way up. There’s still a lot of cash sitting on the sidelines.

When there is pervasive bearishness, that usually means the rally has longer to continue, not less. In this report, we discuss what’s driving the rally and how much further it could go.

Today’s topics: Iran war update, why the economy is resilient, what stocks are leading, our portfolio.

Underlying economy

With the Iran war all but resolved, the market is rapidly re-evaluating the ongoing economic situation. SPX is telling the story as it rips to new highs. The oil-driven recession is invalidated. So what’s the next narrative everyone is latching onto?

No doubt there has been some disruption to global supply chains, particularly oil supply. But this is not a long-term problem. Markets are forward looking, and the likely and predictable outcome is a normalization of Hormuz logistical flows.

The narrative is shifting back to long-term fundamentals. Without the shroud of war, the underlying US economy is quite strong. Unemployment rate sits at an historically low 4.3% and GDP growth is running just under 2%. We already explained last week why zero job growth is not a problem.

In fact, US is going to produce the strongest growth of the G7 countries for 2026. A resilient economy absorbs all types of disruptions. So what are the sources of this strength? Let’s break it down…

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Consumers and businesses have lots of cash

• Manufacturing and transport resurgence

• Stock earnings underpinning this rally

• Kevin Warsh’s nomination hearing

• Iran war update

• Which stocks are leading?

• Our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

The short squeeze is on! The stock market rebounded from lows to highs in the shortest amount of time, ever.

The market is rapidly climbing the wall of worry. Several weeks ago we called the off-ramp and oversold conditions. We were fortunate to have bought the dip near lows.

Our IWM position is up 15% from the low and outperforming the SPX. Short-term trades given in prior weeks are outperforming as well (MRVL +30% since).

Many investors are in disbelief of this rally, still holding cash waiting for a dip to re-enter. But there are no dips in a lock-out rally. Without a plan to re-enter, they are missing some of the strongest rally days in the entire year. Hence why market timing is essential.

Today’s topics: Why investors are still worried about recession, ceasefire progress, three pillars of a bull market, our portfolio.

Wall of worry

A Wall of Worry is a classic psychological effect where the market keeps rising in the face of skepticism. Lately we are hearing from clients, peers, and social media plenty of “reasons” why the market should not be at highs. The reasons generally revolve around the Iran ceasefire, the status of Hormuz, elevated oil prices, Fed rate hikes, AI disruption, private credit, and overall market fragility. Plenty of reasons to be worried.

When the market rebounds sharply, investors are caught short or holding cash. The natural reaction is to assume the rally is false and that markets will fall back down. Hence why bearish arguments abound, put forth to justify incorrect assumptions.

The point people miss is that markets look through headwinds as long as the outlook is improving. Think back to Spring 2020 where markets rebounded well before vaccines were announced or lockdowns were lifted:

Similarly in the April 2025 selloff, the 90-day tariff pause was followed by a US-China trade deal shortly after. Markets never retested the lows.

Paradoxically, the wall of worry is necessary to fuel a durable rally. As bears begrudgingly capitulate, their buying adds fuel to the rally. This is market psychology at play.

The question is: Are you fully invested? Or still holding cash, watching this soaring market from the sidelines?

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The rest of this article is for premium members. Upgrade now to continue reading:

• Iran ceasefire holding

• The three pillars of a bull market

• The bottom is in

• Our portfolio and trades

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

We’ve been calling for the off-ramp from the Iran war and the oversold rebound in markets. This has occurred in spectacular fashion within the span of two weeks. The US and Iran are working on a negotiation but the prospects are grim.

Under the hood, there is huge divergence within tech stocks. Certain mega cap stocks like PLTR and TSLA (which we gave as a short idea) are breaking under key supports. Meanwhile, leaders in chips and opto-electronics are breaking to new highs.

Can markets hold this gap-up? Should you be buying here? One thing is for sure — you don’t want to be sitting in cash waiting for the dip that never comes.

Today’s topics: Temporary ceasefire, how the Iran situation resolves, macro and inflation, new portfolio changes.

Temporary ceasefire

On Tues evening, just hours before Trump’s “bomb power plants“ ultimatum was set to expire, Iran and US came to a two-week ceasefire agreement. Both sides are claiming victory, which begs the question: Who blinked?

Iran’s mosaic defense and asymmetric endurance strategy was on full display as they endured against a stronger successor. Because of it, Trump finally understood that Iran does not bend to pressure, and further escalation (hitting power and desalination plants) would not yield strategic results.

We know that last week, Iran rejected a temporary ceasefire and walked away from negotiations. They were comfortable continuing the war thanks to their “preservation” strategy and leverage over Hormuz. Something must have changed to bring them back to the table.

By Trump’s own admission (below) the US accepted Iran’s 10-point plan, as opposed to Trump’s own 15-point plan. This includes removing sanctions and allowing Iran to continue enriching uranium and continue commanding Hormuz. These are meaningful concessions that the US would be ill-advised to agree to unless truly out of options.

It is surprising that Trump would agree to Iran’s terms, which is why the market is highly skeptical this ceasefire will hold. Here’s why:

From the get-go, nuclear disarmament was a strategic priority for the US; allowing enrichment would legitimize Iran’s nuclear program. If the world’s largest military couldn’t stop Iran, no other country and no future US president will dare try again.

Yielding Hormuz to Iran is a huge strategic blunder as well. For one thing, they have the power to disrupt global trade. It gives them leverage over their Gulf neighbors. It also damages the global dominance of the US Dollar as Iran can stipulate trade in Chinese Yuan or Bitcoin. Not good for a US that relies on trade deficits and external debts with the rest of the world.

If Iran imposes a toll on ships passing through Hormuz, they would earn more off of other nations’ oil than they earned selling their own! They would become one of the wealthiest chokepoint operators in maritime history. And that’s before money received from unfrozen assets, restitutions, and sanctions lifting.

So the country with no navy, no air defense, no Supreme Leader, no missile production, and no nukes… managed to extract a major concession from the US. This is not an indictment of Trump or the US military — who certainly did immeasurable damage to the regime. But it appears that Trump was more eager for an off-ramp than Iran. This is crucial to understanding the ceasefire’s durability and the new world order.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

What happens after 2 weeks?

The rest of this article is for premium members. Upgrade now to continue reading:

• What comes next

• Tollbooth in effect

• Oil is flowing

• Global industrial reordering

• Wall of worry

• Fiscal and earnings

• Our portfolio

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

It looks like the off-ramp we’ve been predicting has finally come true. After a classic Trump TACO, the stock market is bouncing back from its worst-case assessment of a prolonged quagmire in Iran and oil-driven recession.

The oversold conditions we highlighted last week are now fueling a short squeeze. And it’s happening right on the March 31st options expiry — a date we gave as a reversal point. NOT a coincidence.

That said, the war is not over. There’s still the thorny issue of finishing what Trump started, and the Strait of Hormuz remains structurally closed. Troops have hit the ground in Iran as we write this. Oil prices are still at heir highs and many pundits are now calling for a recession this year.

Does the market continue its rally? Or do stocks have more to fall? We answer that in today’s note.

Today’s topics: War off-ramp, stock market impact, real rates, technical analysis, our portfolio, 4 trade ideas

Off-ramp prepared

After five weeks of conflict, the US stance on the war has finally shifted. This week Trump introduced the off-ramp that we called for in The End Phase. The administration made several tone shifts that further confirm this off-ramp strategy:

Firstly, Trump said he’s willing to end the campaign “even if Hormuz remains largely closed.” In other words, a unilateral withdrawal from the war without waiting for a surrender. This is politically messy, particularly for Gulf countries who may face more attacks afterwards, but the least bad outcome for markets.

Secondly, they reframed military objectives to conveniently exclude uranium extraction, Hormuz reopening, and regime change. In fact, they claimed the “regime is already changed”. Moving the goalposts this way allows them to claim victory early and therefore truncate the conflict.

Thirdly, Trump told allies (namely Europe and UK) to send their own naval forces to reopen the Strait and get the oil themselves. Another subtle admission that the US will not be extending its part in the conflict much longer.

The importance of this shift cannot be understated. Prior to this week, markets had been pricing the possibility of a multi-month ground war against an unwavering opponent and extensive damage to energy infrastructure. Tuesday’s announcement effectively rules out this worst-case scenario, even though the war still has at least two more weeks to go (according to Trump).

Iran was never going to agree to the US’ negotiation terms, but now that does not matter. No deal is needed to end the war. Rightfully or wrongfully, the US can simply walk away.

This light at the end of the tunnel sparked a sharp bounce back in SPX. As we have said before, the conflict doesn’t need to be fully resolved for the market to bottom. It just needs the news flow to not get worse.

By Thurs we got a classic bad news/good price setup. Even as the US bombards Iran with missiles, oil prices rise to new highs, and a ground incursion looks imminent, stocks staged a strong rally. When markets rally in the face of bad news, that means the worst is already priced in — a classic bottoming sign.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

What this means for stocks…

The rest of this article is for premium members. Upgrade now to continue reading:

• What the Iran war means for stocks

• Real rates caused this selloff

• Technical analysis not confirming?

• Our portfolio

• Short-term trade ideas

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext. We study the US economy and time the stock market.

Stocks suffered another week of losses, and for the first time we saw sustained selling pressure. Several major indices entered correction territory (-10% from highs).

We have been wrong in our assessment of the Iran war outcome, and the conflict is rapidly evolving into something more prolonged and dangerous. The market is starting to price the risk of recession.

In times like these, we think it prudent to manage risk by reducing exposure to stocks. That is exactly what we did this week.

Today’s topics: Iran negotiations and potential escalation, impact on markets, tech selloff, portfolio changes and 3 trade ideas.

Negotiations begin

The fourth week of the war saw a shift from open confrontation to potential diplomacy. On Monday, Trump announced he would delay destroying power plants by 5 days (not other sites though, those continue to be bombed) and concurrently start negotiations with Iran.

Iran publicly denied negotiations are happening, but this is just a guise meant to maintain regime legitimacy and keep hardliners happy. There is evidence that dialogue is indeed happening, as it is mediated by officials from Oman, Qatar, Egypt, Turkey, and Pakistan.

The question now is whether the two sides can meet in the middle. The US released a list of 15 demands that includes nuclear and missile disarmament. For that reason alone, the demands will be unacceptable to Iran. And as these talks are happening, the US and Israel continue to strike industrial/weapons facilities, which frankly damages US’ credibility for any serious settlement.

Iran’s security doctrine is based on using proxy groups, missiles, and nukes as a strategic deterrent against the US and Israel. Nuclear development is a symbol of national sovereignty that they have invested heavily to sustain. Accepting disarmament would be a huge strategic risk, akin to acknowledging permanent defeat.

So Iran countered with its own 5 demands centered around security guarantees, reparations, and full sovereignty over Hormuz. We predict this will be unacceptable to Trump as he hopes to control oil flow in the region going forward.

The negotiations are a good start, and demonstrate that both sides want an offramp. However, given two unwavering positions, these talks are likely a non-starter. Therefore, the war must enter the next stage of escalation — precisely what the markets started to price in this week.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

More escalation

If talks fail, the US/Israel likely ratchet up pressure with more hits on energy infrastructure, hits on civilian infrastructure (water de-salination plants, power plants, etc.), and a ground invasion. Iran will retaliate commensurately.

Saudi Arabia and UAE are considering entering the war, as are Western allies (UK, France, Germany) who have had their remote bases struck. This may sound like World War, but in reality it is World vs. Iran. Iran’s military capabilities are severely eroded, and no major power has been willing to stand alongside them — not even Russia or China.

On the ground, the US has two possible choices: a full-scale invasion, or calibrated incursions. The US is unlikely to go full-scale at this time because of the huge costs of prolonged and attritional combat. The US has taken several weeks just to bring 10K soldiers to the region, whereas Iran is ready to defend with ~1M soldiers. After all this, Trump is against ground invasion and still has political constraints.

The more likely course of action is calibrated military escalation. This means tactical incursions or seizures of high-value strongholds. For example, Kharg Island (Iran’s oil terminal and financial lifeline), seizing Iranian oil tankers, or forcefully re-opening Hormuz.

But this won’t end the war. It just results in an unending cycle of confrontation and negotiation. As long as no progress is made, Iran will consider this a “win” and continue fighting forever. The regime survives, the region is mired in prolonged conflict, Hormuz remains closed, oil prices stay high, and the world verges on recession.

Even though Iran’s military is vastly overpowered, they have some tricks. The regime employs mosaic defense and asymmetric endurance. Their strategy is built around outlasting enemies, not winning quick battles. They absorb assassinations/strikes thanks to decentralized command and underground infrastructure. They retaliate with cheap drones/missiles/proxies to bleed foes economically and politically. They drag out fights into attrition wars because they can endure longer than Western democracies.

Leaders like Khamenei have drilled “preserve the system” since the 1979 Islamic Revolution. No martyrs and no mass army charges; only endurance and measured retaliation. Fight smart, and seek secret offramps to live another day.

Ironically, Trump has a very easy exit. All he has to do is concede the Strait and fully withdraw troops. Let Iran have their missiles and nukes. But this would amount to admitting defeat which means he would never do this. And by refusing to concede in negotiations, he has talked himself into a corner, strategically speaking.

The other offramp is a phased agreement. Iran agrees to restrict portions of its nuclear program, while the US reciprocates through partial lifting of sanctions. Both sides claim strategic victories. Hormuz is reopened, but Iran receives taxes on transit. This is a pragmatic but unlikely solution, as both sides take an all-or-nothing approach.

Impact on markets…

The rest of this article is for premium members. Upgrade now to continue reading:

• Impact on markets

• Tech selloff

• Portfolio changes

• 3 trade ideas

Claim your free trial by clicking the button below!

Read more

Welcome back to MktContext where we study the US economy and time the stock market.

The market entered a downtrend this week as investors are now realizing the Iran war will last much longer than initially expected. However, we believe we’re now entering the end phase of the war.

The SPX selloff is already well advanced in both time and price. We are viewing this as a pullback within a bull market, and expect higher highs to come next.

But there’s a catch. The US needs to make one final push in Iran before withdrawing. A devastating climax, the goal of which is to ensure Iran can’t fight back. This will likely happen within the next two weeks.

We outline what all that means for stock markets. If you are in cash right now, this could be the dip to buy.

Today’s topics: Updates on Iran war, light at the end of the tunnel, end phase, implications for stock markets, FOMC review, gold failing as safe haven, oversold technical conditions.

Escalation in Iran war

The war in Iran continued to escalate. Two reasons why this week was significant: 1) energy infrastructure was hit for the first time, and 2) natural gas facilities have been hit for the first time.

Iran’s South Pars natural gas field was hit, as was Qatar’s LNG export facilities, Saudi Arabia, Kuwait, Bahrain, UAE, and some others. Up until now, strikes were mostly contained to military targets, but it appears that gloves have come off. Trump has called for a de-escalation of strikes against oil and gas facilities.

Notably, this marks the first strike on Iran’s oil production facilities. In turn, the Islamic Revolutionary Guard (IRGC) announced retaliation is not yet finished, and issued a list of energy sites across the Gulf that they would target.

The strike on Iran’s facilities was done by Israeli forces without the explicit approval of the US. A stark reminder that the US and Israel are not perfectly aligned. Trump wants a limited win and is indifferent to long-term instability; Israel wants prolonged involvement by the US to bog down Iran. The outcome of the war may be outside of the US’ control.

To see our trades and portfolio, consider upgrading to paid subscriber status.

Upgrade Today!

The US’ dilemma

The “quick end” narrative is failing. Trump initially characterized this war as a “minor excursion” against a military that was supposedly “obliterated”, and that it would be over in a matter of days. Those claims are now contradicted by the President’s desperate pleas for NATO and China to intervene.

The US now finds itself in a quagmire similar to Iraq and Afghanistan. It has overwhelming military dominance and are exacting a tremendous toll. But the opponent is surviving and fighting back with small strikes and guerilla warfare.

Trump’s remaining escalatory options are all bad. He can try to secure the Gulf indefinitely, but this is expensive and may not even be possible. He can invade and hold Kharg Island, said to be Iran’s financial lifeline, but the costs would also be high, as would be overturning the regime.

The “least bad” option is a diplomatic offramp — declare Iran’s military degraded, concede control of the Strait, and let Gulf countries/oil importers deal with the fallout. Though embarrassing for Trump, this would be more favorable than a prolonged, unwinnable war.

Light at the end of the tunnel?

We continue to believe US involvement in Iran will last weeks, not months, let alone years. This has always been the timeline maintained by Trump, and we outlined reasons why he is incentivized to stick to this plan.

Interestingly, the market (as measured by options pricing) is losing faith in this outlook and is starting to assume this war will last for months longer. An understandable reaction, since Trump repeatedly saying “almost over” has always led to further escalation from both sides.

Nevertheless, there were some positive developments this week. Israeli Prime Minister Benjamin Netanyahu announced they would no longer target Iran’s energy infrastructure, and that “the war will end way faster than we think”. He also claims Iran no longer has uranium-enrichment capacity, and committed to helping reopen Hormuz.

Shortly after the market closed on Friday, Trump published a Truth post claiming that Iran’s military is severely hampered, and the US is considering winding down the mission:

That led to stocks bouncing sharply higher near the close, after an ugly trading session (made worse by quad witching expiry of options and futures, which often leads to unusual volatility).

By now, the market knows not to take Trump at face value. As we’ve said before, the administration has been talking up markets, keeping a lid on oil prices, as the invasion reaches fever pitch. This week was perhaps the first time that the market realized this will be a protracted battle.

Going back to Trump’s Truth post, the important line is this: “The Hormuz Strait will have to be guarded and policed by other nations who use it”. This effectively gives Trump a plausible withdrawal path without the laborious work of actually keeping the Strait open. He’s saying, “Our job is done here, it’s now others’ job to keep it going.”

It also gives Iran some leeway to continue controlling the Strait, perhaps even levy a toll on traffic. A concession that Iran may quietly accept, as it cements their stranglehold on world oil (the strongest military in the world could not take it) while extracting economic rent from the entire Gulf region.

But here’s the catch: Before withdrawing from the region, the US needs to make a final push to ensure Iran’s offensive forces are neutralized. This could be a ground invasion, a takeover of Kharg Island, or some other devastating climax. The goal is to ensure that Iran cannot fight back once the US withdraws. This will likely happen within the next two weeks as thousands of Marines are en route to the Gulf.

This is Trump’s true meaning of “very close to meeting our objectives”.

End phase of the war…

The rest of this article is for premium members. Upgrade now to continue reading:

• Now entering the end phase of war

• Implications for stock markets

• FOMC looks through inflation

• Gold failing as safe haven

• Technical analysis - Oversold

Claim your free trial by clicking the button below!

Read more