Kid's Hurdles

The Israel-Iran War will be over before you know it.  The market "overcoming" this event, effectively jumping over kid's hurdles, will be hailed as bullish.  I can already picture the bullish reaction if we get a short term bounce on Monday-Tuesday.   Those managing real money are not freaking out about a war that will last a few days.  Even if it lasted a few months, the fund managers would NOT care.  

Israel knows that it can get away with a lot of war crimes (anywhere) as long as Iran's crude oil export capacity is not touched.  That's a red line they are not going to cross.  Iran's leaders also realize that if they do anything adventurous that would cause a spike in oil prices, it would make regime change even more likely.  So the most likely scenario is a nothingburger for the financial markets.  And the markets are pricing in that fact, by not doing much.  It may freak out some headline focused overleveraged day traders and 0DTE options jockeys but its not going to move the needle for fund managers.  

The war will get a lot of air time and coverage by a hyperbolic media that will try to make it like its the start of WW3.  And I'm sure a lot of bulls will buy into the belief that this is an unstoppable bull market that can overcome anything, including the threat of WW3!  All of a sudden, instead of war being a negative catalyst, it will make people even more bullish on the market.  Of course, getting even more bullish just 2% from all time highs, at historically sky high valuations, with economic growth slowing, and with a tariff off/on switch active in the White House.  The overriding view that I see on Twitter these days is BTFD, TACO, dips on geopolitics is always a buying opportunity, nothing stops this train, etc.  Retail has been brainwashed into believing that the US stock market is invincible.

The 2022 bear market has done nothing to discourage these retail stock gamblers who fashion themselves as long term investors in high growth stocks, with no regard for valuations or fundamentals.  In fact, the 2020 Covid flash bear market and 2022 bear market may have emboldened these punters into believing that if you don't sell during a big down move, stocks will always comeback quickly, and go much higher quickly.  The thought of an extended bear market is the farthest thing from their minds.  This attitude coincides with the highest allocation to US equities in the last 75 years.  Higher than 2000, higher than end of 2021.  

The more you experience the markets, the more you realize that irrational herd behavior can be rampant in the short run to intermediate run.  But this usually results in a painful payback for that behavior in the long run.  

Nothing noteworthy in the COT or put/call ratio data for last week.  The bullish forces from the June quarterly opex are soon to be behind us, and I expect a post opex hangover after the huge rally from the April lows to the June highs.  Lots of calls options are in the money, that will soon expire, forcing dealer selling, and most June put deltas have already evaporated.  We are also entering the stock buyback blackout period in late June, which will eliminate a lot of the positive buy flows for US stocks.  These seasonal factors show up in the performance historically for the 2nd half of June, which are among the weakest of the year.  

The tepid reaction of the Treasury market to the Israel/Iran War shows how little safe haven demand there is for US Treasuries.  The world is awash in Treasuries after the blowout annual budget busters from the US government since 2020.  The unwillingness for Treasuries to meaningfully rally without a big stock selloff means that a stocks up, bonds up scenario is highly unlikely even in a Fed cutting cycle.  This bond market weakness is an incremental negative for stocks.  Bonds continue to trade terrible and I don't see it improving much until you get closer to the end of Powell's term, when the bond market tries to price in a much more dovish Fed from May 2026 onwards.  

Last week, we finally reached my target price level for a good risk/reward short at SPX 6050.  I entered a short SPX position around those levels and plan to hold the short position for several days.