War

What a difference a month makes. In my last post I mentioned how the market structure suggested more downside was in store and lo and behold we got the downside I expected and then some. Unless you've been living under a rock, it's obvious why the market has been going down. Since the start of the year I've been more or less  been saying that the market was overheated...running on fumes is a term I had used. With the market down about 10% from the recent peak, we have seen a very significant reset in sentiment. In fact, some sentiment indicators have reset to levels seen near seen near major market lows. Here are a couple of them:

It should be noted that the CTA positioning chart was as of March 23 and so it is probably at an even lower reading right now. At the very least, it would appear that the market is near a ST low. Having said that, it would not surprise me to see further downside Monday...at least initially, just given how the market closed at the lows of the day on Friday making a new low for this move down. 

So, let's talk about this war. Why did the US invade is the question a lot of people are asking. In my opinion it was because of Israel. Israel always wanted this war because Iran has been a threat to them directly and though the proxies they support. They just needed an excuse to attack. Given Trump's "success" in Venezuela in toppling a regime and installing someone who was co-operative with the US, he was probably convinced by Israel that he could get the same result in Iran especially given the protests earlier in the year which suggested that Iran was ready for a change. There's no shortage of criticism about the US administration's handling of this war pointing out how they don't appear to have a gameplan and they keep changing the narrative. I have little faith in Trump's decision making ability during this war, but I'm more hopeful of the Israelis . These folks are sharp cookies when it comes to tactics. Just look at how they got to to those Hezbolah fighters with the explosive pagers and how they have been able to assassinate Iranian leaders so quickly. Most pundits are saying that the US underestimated Iran's capabilities, but do you think Israel did? I don't.  Given that Iran is their largest enemy they must have known all about Iran's missile cities and drone capabilities and so if they decided to strike them, they must have calculated that with the help of  the US, they can defeat Iran. You have 2 vastly superior forces against 1. Yes, the asymmetric attacks are a problem, but they can't be sustained given that the US and Israel have total air and Navy dominance knocking out targets at will. Iranian Ballistic missile attacks have slowed to a trickle and drone swarms are still a problem, but have slowed down significantly.

With 2500 US marines arriving in the Gulf,  a lot of people are worried that this signals an immanent ground invasion, perhaps of Kharg island. I seriously doubt that.  It's more likely they are being brought in primarily to secure the straight of Hormuz. If that can be established, Iran loses its only bargaining chip and so that suggests they would be more willing to come to the table sooner rather than later. 

Regardless of how this war turns out, one thing that is almost a certainty is that this will be a major boon for safe US, Canadian, and Australian energy i.e. LNG and oil as the war exposed the vulnerabilities of energy supply from the Gulf region. So, assuming that this war doesn't end up spiraling into a total catastrophe, Trump could  end up looking like an evil genius even though he probably didn't it plan to.  

December NYMEX oil futures are trading at $77 which is a significant discount/backwardation to spot price of $99 and tells you that the oil market expects oil prices to decline significantly longer term. This doesn't mean oil prices will drop tomorrow and there's no guarantee that the market gets this right, but when you see such a disconnect between spot and futures prices in commodities markets like this, in my experience I have found that the market does in fact get it right more often than not and the stats prove it. The last time we saw this degree of backwardation in the oil market was at the peak of oil spike in 2022 after the Ukraine war broke out. After the COVID meltdown the opposite condition was in place whereby longer term futures prices were much higher than spot. 

Final comments. It would not surprise me if we see further downside action early this week given the downside momentum that is in place and the scary headlines. However, given the condition of sentiment indicators, if we get some sort of downside puke, that would suggest we are close to or at a bottom. I certainly have a nauseating feeling about this market which suggests we may be close. I'm also not underestimating the seriousness of the current situation. It's terrible and things could get really worse, it's just that I see some possibilities/signs for things to get better even though the media is suggesting the opposite.