Short-Term Fear, Long-Term Opportunity

The drums of war are beating and the stress of the oil market is weighing heavily on the U.S. equity market. Before war broke out in the Middle East, the U.S. market had already been hit with its first gut punch. AI stocks, which had been the source of the boom, were well off of their highs. Stress was mounting around what AI’s negative impact could be on the real economy, helping to shred multiples of many once high-flying stocks.

My typical routine is to dig through dozens of charts, looking for some hints as to what is to come. Some of the charts are downright gruesome, especially when you are pulling up software names with potentially huge negative disruption from AI. Others are starting to look hopeful, with some names in the datacenter world and hyperscalers coming back to life.

This quarter, however, beat-and-raise earnings reports have frequently been met with selling. Seems like every big spike up finds lots of volume of sellers looking to smack it back down to Earth. The gap-and-go has been so rare during this market phase. Investors are starting to get fatigued.

Recent price action has been shaky. Even on days when the market looked to recover after a streak of losers, the market doesn’t impress on its bounce back. The message is similar across most of the charts I’m seeing. There is weakness and we are in search of a bid that’s simply not showing up with any sort of conviction.

The good news is, there are reasons why the market looks the way it does. As these unknowns begin to settle down and subside, there will be some incredible opportunities. You just have to have the right tools at your disposal to find the diamonds in the rough.

Conflict in Iran

The largest unknown in the market is the ongoing conflict in Iran. This latest conflict is even more concerning because of the ties to the oil market. The U.S. and Iran are duking it out with missiles, but it’s the economic battle that has been taking center stage. The narrow Strait of Hormuz is one of the main arteries of the global oil industry with 20% of daily consumption moving through the Strait.

That Strait has effectively been shut down for all but a few tankers from nations that are friendly with Iran. That bottleneck caused oil prices to skyrocket on the news, and they’ve remained stubbornly high ever since.

Crude Oil


Image Source: TradingView

Crude oil was trading down in the mid $60s at the time of the initial conflict. Prices shot up to nearly double that amount, threatening $120. Since then, it’s been a slow and steady climb higher, with prices in the mid $90s around St Patrick’s Day. This poses a major economic threat to the U.S. Crude prices are the main determinant of gas prices, which means pressure at the pump is here. That pressure is a tax on the U.S. consumer. Further, higher energy prices threaten to push up prices on goods and services. That’s another round of potential inflation the U.S. does not want to see.

More . . .

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Stubborn Inflation

Surveys like the University of Michigan’s monthly survey have shown a noticeable jump in consumer inflation expectations. This implies that households anticipate prices will continue to rise, which can itself fuel further price increases as businesses preemptively pass on higher costs.

Of course, the biggest of the inflation reports is the CPI, the Consumer Price Index. February’s headline number came in 30 bps higher month-over-month, with the yearly number at 2.4%. While that’s not eye-watering by any means, it’s still 40 bps above the Fed’s 2% target rate. It’s important to note that the YoY number cooled from 2.7% in December. Still, it lingers, and with the threat of an upside shock given the move in oil prices investors are still nervous.

Inflation is not categorically bad across the board for all stocks in the universe. In fact, there are several industries which actually benefit from the bump up in inflation.

Dow Jones Industrial Average


Image Source: TradingView

This is about as text-book as it gets on a chart. The pullback for the Dow came down to find support at the 200-day moving average while the RSI came down to oversold levels. RSI ticked back up through 30 as the Dow bounced off the lows and we’ve got ourselves a “Buy” signal.

Investors are certainly hoping that the Dow can follow-through on this move off the lows. That’s something it failed to do last week. That intraday reversal Tuesday, March 10th was brutal, leading to the market taking out the Monday lows into the end of the week. If we can hold on here and get a little momentum going, we can finally say that we have broken the spell.

The risks remain from further tensions in the Middle East so keep your eyes on oil prices. They continue to be the main driving force of this market.

Individual Darlings

The most recent darlings of the market, the AI-stack, have been cut down from their heights. There are countless names in this space and other tech-related areas which were once propelling the market higher and are now 10%, 20% or even 30% off.

There are several names that come to mind in the “AI-stack” that fell victim to Mr. Market recently. This list includes Palantir, Tempus AI and Vertiv, just to name a few. These were all once high-flying, untouchable stocks that have come back down to Earth.

Targeting Long-Term Gains Despite Today’s Volatility

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Good Investing,

David Bartosiak

Dave Bartosiak is Zacks' resident momentum trading and earnings surprise expert. As the manager of two portfolio services, he selects fast-moving stocks and delivers commentary to help investors identify emerging opportunities with significant upside potential.

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