Hormuz Selloff

The worst possible scenario for an Iran War was the closing of the Strait of Hormuz.  Its happening.  All eyes are on Hormuz.  With oil continuing to skyrocket, we have cracked the SPX 6700 level overnight.  It looks like the next strong support level is around the November lows of 6520.  We are now entering some pain territory.  Last week, the dip buyers kept coming back, even on Friday, there were some face ripper rallies intraday off the bottom.  VIX kept rising, but it didn't match the controlled price action in the SPX.  Now things are starting to move, with oil blasting through 100 with ease.

With the war, customers are accumulating puts, especially tail hedges.  Customer SPX put delta positioning reached the most negative in history, even more than the tariff panic in April.  This large put position should help buffer the downside, even with the parabolic moves in oil.  

This large put position also explains why you've seen the regular trading hours trade much more strongly than the overnight hours.  With options traded mostly during the cash session, it seems that customers monetizing their hedges last week have been responsible for some vicious intraday face rippers during US hours.  We could see more of that this week.  

 

So far in 2026, you've seen a big inflow into international stock ETFs, as well as emerging market ETFs.   Notable is the EWY, the South Korea ETF with a huge inflow relative to total AUM.  The outflows have come mainly from the fast money US passive equity ETFs:  SPY, QQQ, IWM.  It is probably hedge funds responsible for these outflows, as they reduce their US equity exposure, especially big cap tech.

 

On the other hand, retail trading data from Citadel seems to show retail investors are going hog wild buying stocks in 2026.  Especially on down days.  I am surprised to see them this aggressive when the market has been flat to down, and with most of their favorite names down big.  Long term, this is ominous.  

The dark pool data also shows retail buying the dip, as the DIX hasn't dropped meaningfully over the past several days of weakness.  Usually DIX dropping to lower levels is one of the necessary ingredients to form a bottom.  

 

Nothing really notable in the COT data, although you did see small speculators reduce their net long position in SPX futures.  Its now down towards the middle of the range for the past 2 years.  

The bond market weakness after a horrible nonfarm payrolls number last Friday is bad news.  The last thing the stock market needed beyond skyrocket oil prices is a bond market that can't find any sort of safehaven bid.  Worldwide, bonds are selling off, which is eerily similar to the March 2025 selloff.  The last thing this market needs is bond investors to also be losing money as equities go down.   

We got some news overnight from the G7 nations wanting to release oil from their SPR.  Unfortunately for the US, it already released so much oil from the SPR in 2022, that the US won't be able to release much this time around.  Plus, the fundamental problem of lack of oil passing through the Strait is what has the market worried.  Releasing SPR oil is a short term band aid on a gushing wound.  While Iran keeps getting pummelled, they still have a massive number of drones that can be released towards ships trying to pass the Strait.  US Navy escorts are not going to be a solution.  Only a ceasefire or an end to the war will restart the flow of ships.  While Iran is getting pummelled, they still have plenty of drones that they can use to keep ship traffic from passing through.  

Made a bad call last week about wanting to short oil, but thought twice about it when I saw the strength throughout the week, with headline risk, as well the price levels that were not high enough to provide a good risk/reward.  Luckily didn't go with my first instinct.  The oil market is beginning to get unhinged, so a bit too risky to trade at the moment.   

As for stocks, you need to see more investors de-risk to get a high probability buy setup.  We haven't seen meaningful capitulation, just a gloomy atmosphere where retail keeps trying to buy the dip.  Things to look for that we've seen sufficient de-risking include:  higher put/call ratios (higher than last week), lower DIX, SPX not going down despite oil going up.  

Looking to get out of my longs after the cash open, hoping for a rally in the first hour from retail buying and SPX put monetization to get out as gracefully as possible from bad longs.  Will look to re-enter longs if SPX gets to the 6500-6540 level.  Intermediate term (looking out 4+ weeeks), SPX is likely to have a strong bounce back towards the 6900-7000 area.  Short term, it looks weak without a TACO.