Last week I made mention that after the first 12 weeks of 2026 had passed that only 3 of these weeks were positive for the US stock market. No sooner did I make this observation that the markets then did an about face and began to retrace the decline. Not only did the markets retrace the decline, but they bounced, almost exactly as they did last year after the Tariff Tussle. I took the time to go back to a newsletter at the end of 2025 and captured the chart showing the entire market action of 2025. I find this really quite fascinating as it shows how small the pullbacks were but how truly large the decline was this same time last year:
I don’t expect this decline to match the 21% seen above, but the manner in which this market has recovered in the last 10 trading days seems to look quite similar. Which brings us to the question, “What’s next?”
After President Trump threatened to destroy an entire civilization (and the White House actually had to clarify that nukes wouldn't be used), the world waited to see if Iran would accept the ultimatum from the United States for a ceasefire by the stated deadline. It took until the 11th hour, but news finally broke that the Middle Eastern nation had agreed. Once it did, stocks exploded higher and oil prices collapsed. The agreement was reportedly brokered by Pakistan of all places, though speculation is swirling that Iran's ally China is actually behind it. While all the geopolitical intrigue is interesting, I am not a geopolitical analyst so I will keep the focus on the markets.
The S&P 500 spent much of the time from late October to early March in the zone between 6800-7000 and could not break above there. Now, all the trading that took place within that region represents potential overhead supply, aka resistance. The market has faced similar hurdles before in recent years and blew through the resistance as if it were nothing. After the strong bounce last week, we now sit at a bit of a crossroads. It seems to me that we now need a variety of things to happen to help the market through the congestion that it is now facing. Below I am going to show two charts that were presented by Saut Research last week. The first one is the clear congestion area that now needs to be cleared. The second shows how the markets have gapped right up into this congestion area and now need to either stop for a moment and catch their breath, retest the lows, or move up and out to new high ground.
The overhead congestion box chart:
The bounce off the lows followed by the gap up higher which now makes the markets overextended in the very short run:
Please take a moment to look at both these as they both present different messages. The impact of the Iran war in just its first month and its knock-on effects on oil prices and global supply chains have already left a sizeable imprint on the global economy. Global economic growth has slowed markedly, while inflationary pressures have surged. Recession risk remains low for now, and the recent ceasefire reinforces that view. However, a return to normalcy is unlikely to come immediately, suggesting a continued cautious approach to global equities. The global composite (services and manufacturing) PMI plunged 2.4 points in March, the largest monthly decline in nearly four years, to 51.0, the lowest reading since the tariffs a year ago. While this remains well above the 47.8 threshold historically associated with global recession and the worst equity bear markets, it abruptly ended the year’s strong start.
A quick update on sentiment and our overall market view. We are in the non-recession camp. But seasonals are working against us as we enter the weakest period of the 4-year presidential cycle, with the market typically peaking in late April and bottoming at the end of September. Maybe some of this was pulled forward due to the war in Iran. In any event, we have seen some risks building over the past few months. A full-fledged bear market is not our base case, but extra caution is warranted in our view. This then forces me to again reexamine what “typically happens” at times like this. Last week, the VIX closed below 20 after surging and closing above 30 in March. The VIX, beginning a measure of volatility on the downside, clearly illustrates what we’ve just been through. In our view, this is now the 3rd sign confirming the bottom is in. Of course, we realize the future path of the war is uncertain. But this has been true of all major conflicts. Here is where the VIX sits now:
The reason why I bring up this illustration is to show that the market generally performs well after the VIX declines from its highs. With a high level of consistency, this could imply an advance of approximately 9%, which according to Thomas Lee of FundStrat Direct, could place the S&P 500 above 7,400 at new all-time highs.
Coming into this week, as seen in the chart above, after a big gap higher in price, US equities were in the very short-term a bit frothy. On Monday of this week, equity markets were surprisingly resilient given the sharp bounce in the price of crude due to a breakdown in the peace talks. According to technician Mark Newton, “While a bit higher prices could happen this week, this looks to be an overlapping three-wave bounce that should ultimately fail and lead Crude back down to new lows for April. The first area of meaningful resistance lies near $107-$107.50 but can't rule out $111 before the start of a selloff which undercuts $91 the intra-day low for continuous WTI Crude futures contracts. Ultimately, Crude oil looks to have a lengthy slide coming which in my view, signals the start of more meaningful traffic through the Hormuz Strait and possible further de-escalation.” Here is his picture of what he is expecting:
Should inflation remain tame- other than the effect of oil prices, and should earnings begin to come in stronger than expected, and should the conflict not escalate, the fall in oil prices and the stabilization of non-inflated interest rates could be the backdrop for this post 30 VIX to be the precursor to another market advance.
It is really too early to forecast, but the giant financial companies of the US have started earnings season quite positively, and this could be what is needed to make investors less concerned about the Iran conflict and more concerned about missing out on another up move. Many market prognosticators are looking for a “four wave action” to feel comfortable putting their green light back on. Instead, they continue to flash their cautionary yellow light. They wanted a decline, then a bounce, then a retest of the lows, and then a resumption of the advance. If this is what “everybody” is waiting for to put their funds back into the risk markets, chances are, the train might just leave the station and leave without them!
In the end, the conflict seems to fairly well contained, the negatives of a second year of a Presidential term still seem to haunt us, and who could possibly handicap the Midterms in November. But at the end of the day, AI is making earnings even stronger, and with the US a net exporter of petroleum-based product our economy still seems to be charging forward. Hopefully, our equity prices should reflect this positive future.
- Ken South, Tower 68 Financial Advisors, Newport Beach
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