The VIX futures curve flipped from backwardation to contango this morning. First time since the war started.
I wrote about this being a primary signal for a "Traders Market." For the last month, the market was saying "I'm scared right now and I don't know when it ends." This morning, it said "The worst is probably behind me."
That's a big deal.
We talked about it on State of the Market with Mark Sebastian this morning. Mark pulled up the curve live. Yesterday it was inverted. Today it flipped. That's a warning shot from the most powerful signal in the market. Not a warning that something bad is coming. A warning that the environment is shifting. The "Traders Market" isn't gone, but it's changing shape.
The Ceasefire Changed the Math
The ceasefire is real. The market reaction is real, even if slightly overdone for a day or so. Oil dropped $20. The dollar, fixed income, commodities. All exhaling.
It's early to make this call, but I think the ceasefire holds and this war, as far as WTI and the VIX are concerned, is functionally over. Trump claims the win. Secretary Hegseth’s comment on an Iranian drone attack that happened this morning is maybe the biggest tell. “It takes time for ceasefires to take hold”. Just before the deadline he was ready to blow everything up. Now he’s signaling empathy. It’s clear he has marching orders to do so. It's a coordinated effort on the US front to signal de-escalation. Trump is done here. That's his style.
The market is done with this too. Last Friday, crude was up $10 and the S&P finished green. That was the tell. The correlation cracked. The market had already decided it was ready to move on.
Every strategist on earth can now stick a fork in the high of crude oil. The crazy tail risk is gone. The difference between "oil could go to $140" and "oil is settling in the 80s" is enormous for anyone modeling forward inflation.
The Fed Goes Back to Being the Fed
The Fed minutes came across the wire as I was drafting this. The Fed goes back to being a split committee arguing about data. Hawks will hawk. Doves will dove. Powell, even as a lame duck, will project confidence. We went from 80 percent odds of no rate cut to about 60 percent overnight. The market wants to price in cuts. The data hasn't confirmed they're coming.
I'm not saying the coast is totally clear. I'm saying the worst is likely behind us. Israel and Saudi Arabia are disappointed because they don't get regime change. Israel is signaling it's not over. The negotiating plans are seemingly not close. They'll have to iron out the Hormuz details. As far as the market is concerned, the strait is open and they’ll figure the rest out.
Crude still has $30 lower to go to get back to pre-war levels. Empty tankers need loading. The journey from the Gulf to Asia takes a month. Even if everything goes perfectly, crude at $80 to $90 is not crude at $65. That's a different inflation picture for the Fed.
What I'm Doing This Week
It's still a trading environment and plenty of people disagree with my sentiment. The market priced "war over" in hours. The SPX is now only 3 percent from an all time high. Today, the dollar sold off further than the oil move justified. It erased nearly all its war gains across EUR, GBP, JPY, and AUD.
That's sentiment running ahead of fundamentals. The data will be funky for weeks. Don't mistake the relief rally for pure clarity. There will be chop as the market digests this and there are other risks like private credit lurking.
For the next week, in stocks, I'm selectively buying dips and selling overextended rallies. I'm using 0DTE options because they have an embedded stop. The upcoming weeks will be choppy, but narrower in range. Traders do well in this market. It's just a different kind of market.
Macro got beat up this past month in a one-factor, headline-driven market. That's changing. I'm watching the dollar, gold, and fixed income because those assets will digest the data first and signal which sectors should perform well from here.
This is exactly the system I'm building for the Reboot. That's been neglected due to the Iran conflict. Look for an update email about that by the end of the week.
Enjoy the Process,
Tim