U.S. stocks will need to consolidate Monday’s rally quickly this week, and reclaim a key level tied to future gains, if markets are to start the process of shutting out the impact of the war in Iran and focus on economic and corporate fundamentals heading into the second quarter.The S&P 500 posted its third-largest gain of the year on Monday, rising nearly 75 points, or 1.15% on the session, to close at 6581 points, as comments from President Donald Trump suggested a path to peace in the four-weeks-long conflict in the Persian Gulf.
However, that advance only brought the benchmark back to levels seen late last week, and it remains more than halfway toward correction territory, having fallen 5.7% from its record high in late January. And stocks look weaker again in early Tuesday trading, with the S&P 500 and Dow Jones Industrial Average off 0.4%.
Meanwhile, both Iran and Israel stepped up their attacks in the region last night and U.S. troops are reportedly being redeployed from Japan amid the five-day window established on Monday by the president for talks with Tehran. Reports also indicate that Saudi Arabia and the United Arab Emirates could join the broadening conflict.
Oil prices were also moving higher in early Tuesday trading, with Brent crude futures contracts for June delivery, the global benchmark, rising 1.6% to $101.58 a barrel and WTI futures gaining 2.9% to trade north of the $90 a barrel mark.
The Cboe Group’s VIX index, meanwhile, resumed its recent climb in early Tuesday trading and was last marked at 26.78, a level that suggests daily swings of 1.7%, or 110 points, for the S&P 500 over the coming month.
“Trump’s temporary pause on strikes briefly supported risk sentiment, but that calm looks fragile after Iran denied negotiations and oil prices moved higher again,” Saxo Bank strategists wrote. “With a significant share of global energy flows tied to the Strait of Hormuz, investors should expect volatility to stay closely linked to geopolitical headlines and energy markets.”
Energy market moves are likely to prove crucial in supporting and building on Monday’s stock market gains, given their impact on both Treasury bond yields and the outlook for Federal Reserve interest rates over the coming months.
“The war has resulted in lasting damage to infrastructure, so even if it’s over soon energy prices may well remain higher—and bond and equity prices lower—for longer than they otherwise would have been,” said Thomas Mathews, head of Asia Pacific markets at Capital Economics.
That could test a central market theme over the coming days, which suggests the S&P 500 needs to reclaim its 200-day moving average—a key metric used by technical analysts to gauge future performance that was last pegged at 6624 points.
The benchmark breached that level for the first time in more than a year last Friday, and remains around 0.65% from taking it back.
The S&P 500 has retreated below its 200-day moving average less than 30 times over the past 75 years, and normally recaptures it within 10 days. Getting back above it within three days is normally seen as bullish, however, and taking longer than 10 is typically considered a sign of further weakness to come.
“The 200-day moving average isn’t necessarily a line-in-the-sand, but a key level of the market’s overall health,” said Eric Clark, portfolio manager at Logo ETF and chief investment officer at Accuvest.
“The November lows of 6540 points will be a true test of this market,” he added. “This is where I believe the real ‘line-in-the-sand’ moment may occur.”
