Last Monday, we looked at this chart and talked about the "set up for a correction in stocks" …
We had been watching this big trendline for the better part of the past two months — a nearly perfect 45 degree angle ascent of the world's benchmark stock market (proxy for economic and geopolitical health and outlook).
And we talked about the technical reversal signal that materialized (the outside day) in the S&P futures, Russell 2000 futures, Dow futures and the German Dax futures.
And we talked about the breakdown of this important trendline on April 4th.
With that, here's the up-to-date look at this chart …
As you can see, the break of the line did indeed start a correction in stocks. It's underway. As of today's close, the S&P futures are down 4.5% from the (record) highs of early this month. The Nasdaq futures are down 4.6%. Dow futures are down 6%. And the Russell futures (small caps) are down 8.4% from peak to trough, over just two weeks.
So, what's the driver?
Is it the Fed's lack of confidence in the disinflation trend?
Or is it geopolitical threats that markets have been (mostly) ignoring, but have now become the central focus?
It looks like the latter.
If we look back to the technical reversal signal in stocks. It happened on April 1st. That was market reaction to Israel's attack on the Iranian consulate in Syria.
A few days later, the big trendline in stocks gave way when a flurry of geopolitical headlines hit, ranging from the threat of U.S./Israel policy change to U.S./Taiwan policy confusion, to provocative (to Russia) Ukraine/NATO relations.
Then later that day, this headline (below) hit, warning of a retaliatory attack on Israel from Iran.
That brings us to the events of this past weekend, and the market behavior today.
As we discussed in my April 4 note (here), with these events, the world became more dangerous, and with that, rate cut timing becomes less important for markets.
The dominant theme for markets for now is risk aversion, and capital flows will be driven by whether or not there is escalation (in this case, a response by Israel to Iranian attacks over the past weekend).
Where does capital flow in times of global risk aversion? U.S. Treasuries (still). Gold. The Dollar. And the big tech oligopoly has also proven to be a favored safe-haven in the crises of recent years, and likely even more so in the age of generative AI.
De-escalation should trigger a very healthy appetite to buy into the correction in stocks.
