🍔Off-Ramp Prepared, Market Rebound Starting

Oversold conditions are now fueling a short squeeze

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.

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What this means for stocks…

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