Hey Trader.
Something very impressive happened today. Once you know how to read the macro market signals underneath the headlines, you won’t get caught on the wrong side of these types of moves.
We covered this in State of the Market this morning. Check it out if you didn’t catch the show.
Over the weekend, President Trump completely reversed his messaging, and the market reacted opposite of what you might think.
President Trump had been saying “The strait needs to be open.” and “Gas prices will come down quickly”. Yesterday morning, he ordered a blockade, completely closing the Strait of Hormuz. AND he said that maybe we have to get used to higher gas prices through November
A week ago these comments and actions were unthinkable. Yet stocks closed the day one percent higher.
That tells you everything you need to know about where we are.
For weeks, the VIX futures curve was in backwardation. That means the market was pricing more risk right now than 30 to 60 days from now. It is the financial equivalent of a smoke alarm going off in your kitchen. When the curve looks like that, the message is simple: something bad and unknown is happening now, and we don’t know how to price it.
Last Wednesday, when the ceasefire hit, the curve flipped to contango. That means the risk moved from unknown to known. The smoke alarm stopped. The VIX futures curve slopes upward from left to right, which is how it looks about 85 percent of the time. Normal.
That flip is the most important chart in the market right now and almost nobody is talking about it.
Why the Blockade Did Not Matter
Think about what happened in the last 48 hours. For the first time since this conflict started, both leaders signaled to their own people to prepare for sacrifice. Trump told Americans gas prices might stay high through November because Iran is digging in. Iran floated giving up uranium enrichment because they realize we are digging in. When both sides stop bluffing and start preparing their people for the cost of staying at the table, that is a different signal than anything we have seen since the war started.
The market read all of it the same way: both sides are positioning for a deal, not a fight.
The VIX curve told you this before the headlines did. On the Sunday night reopen after "talks collapsed" and the blockade announcement, you might have expected a complete reversal of last week's rally. However, we barely got a dip to buy, and just a slow drift higher. No follow-through. No panic.
Nobody believes Trump is going to keep the strait closed forever. The market has moved on. So they yawn and buy the dip.
The Screaming Baby
Mark had a hilarious analogy on the show. You know when you are at somebody's house and their three-year-old is screaming over something stupid? The parent completely tunes it out and have a full conversation with you. They are not ignoring the kid. They are just not reacting to every tantrum.
That is what the stock market is doing with Iran right now. The VIX curve flipped to contango. Even the 8 dollar overnight rally in oil could not hold. Stocks closed green on blockade day. The parent is not paying attention to the screaming anymore.
Until that kid picks up a knife, they are not going to.
What This Means for You
We are in a transition. Not a crisis. Not fully risk-on. Somewhere in the middle. The VIX curve flip is only a few days old. It's the signal to start getting your head out of the shell and start looking around. That does not mean go all in. There is still headline risk. It means start opening up all your trading strategies. Things that have felt broken will be working now.
If you want to know where we are looking, check out the Ticker Highlight show. We ran through eight names this week that should behave more like normal. That is the place to start.
Watch the VIX curve. If it stays in contango, the transition is real. If it flips back to backwardation, the kid found the knife.
Enjoy the process,
Tim