No Dip Left Unbought

Once again, this weekend brought a slew of unpleasant news regarding the situation in the Persian Gulf.  The failure of the peace talks in Pakistan and the subsequent announcement of a US blockade of the Strait of Hormuz were treated as catalysts for sharply higher oil futures and lower stock index futures when they re-opened last night.  As I type this, only one of those market reactions remains in place.  Care to guess which?

We could certainly attribute the ferocity of the initial 1.3% drop to early jitters, but note the speed of the subsequent bounce on the first modest decline in oil futures.  That shows how eager stock traders are for any hint of decent news.  That first dip in oil futures didn’t last long, but the ratchet effect in stocks did.  By the time that US traders began waking up, ES futures had recovered more than half their initial drop even as oil remained within its early trading range.

2-Days, June ES Futures (white), May WTI Futures (blue), June Brent Futures (Red)

Source: Bloomberg

The prevailing feeling among many traders was that things would somehow work out before the 10AM ET deadline.  The notion of the “TACO trade” or “Trump Put” remains firmly embedded in traders’ mindsets.  Many seemed to be expecting some sort of announcement that ameliorated the situation shortly before the blockade began. 

But this time they did not.  The President announced that the blockade had begun as scheduled, and early reports showed that at least two tankers turned away from the Strait shortly thereafter.  Nonetheless, stock traders once again heard what they wanted to hear (and disregarded the rest, to paraphrase Paul Simon) just before the deadline. 

Around 9:45 ET, stocks shot higher and oil ticked lower without an initially obvious headline.  It soon became evident that the reason was a post on X by a New York Post reporter that Iranian officials were still considering giving up nuclear enrichment in order to end the war.  That indeed would be good news, of course, as would any serious proposal by either side that could bring an end to the situation.  Unfortunately, the reporter herself clarified the reporting after doubts emerged about its timing and accuracy.

Source: X

Source: X

Interestingly, the reporter’s initial tweet was ignored for about two hours, so it is not clear what caused it to move markets at that particular moment just before the deadline.  Presumably it got an influential re-tweet that hit eager traders at the correct moment.  Yet the initial market reaction held, and the advance continued regardless. 

What we learned is that the news doesn’t actually matter to stock traders.  Instead, what does matter is that there is an excuse for stocks to do what the majority of investors want and expect them to do.  Commodity traders are forced to live in the present, where immediate considerations of supply and demand influence current prices.  Indeed, while the price of crude has fallen from its initial highs, it remains elevated.  Stock traders, on the other hand, live in a world of expectations.  If the prospects for the future are rosy, they can outweigh inconvenient news in the present tense. 

That is what we see now.  Investors expect an imminent end to the war in the Gulf with few lasting consequences.  The gloomy present is being deemed as irrelevant to future prospects.  Perhaps that is the case, perhaps not.  But it is clear that positive psychology rules, and thus the efficacy of buying dips remains in place.