Markets Face Reset as Oil Climbs and Earnings Begin

The peace talks with Iran seemed to have ended on a sour note, sending IG weekend oil prices higher by around 4% and the IG US Tech 100 lower by more than 1%. Clearly, the market was betting on a positive resolution to the war with the stocks up last week and oil prices down. That will now need to unwind some. The one thing we just do not know is what kind of messaging comes across at 7 AM on Monday morning about the great progress being made in talks, or any morning, or afternoon, or evening, or any day of the week.

If the war is not over, then, in theory, the entire gap created on April 8 should be filled, and the S&P 500 should move back to around 6,620 over the course of this week, at a minimum. If the index gaps lower at the start of trading on Monday and fails to fill that gap, it would likely result in an island reversal top pattern on the intraday charts. There is little justification for the stock market to be trading at current levels if the conflict continues and oil prices remain at $100 or higher.

That would suggest there is a chance that some, if not all, of the sharp drop in oil is reversed, with WTI potentially moving back toward the $105 to $110 range. That would not be surprising. Straight-line declines like the one seen on the charts can at times be treated like gaps, and more recently, oil prices have shown a tendency to retrace those types of moves.

This week also marks the start of earnings season, and unless companies like JPMorgan, Taiwan Semi, and Netflix deliver exceptionally strong results, the options market is likely to be unforgiving in the post-earnings reaction.

All three stocks currently have positive gamma positioning, which means hedging flows will lead market makers to sell into strength. They also have positive delta positioning, so once earnings are released and implied volatility declines, market makers will likely be overhedged and have stock to sell.

At the same time, as implied volatility resets, out-of-the-money calls will see significant premium decay. Unless these companies deliver meaningful beats and provide very strong outlooks, they are likely to face notable upside headwinds. Additionally, max pain levels as of Friday are below current spot prices, another indication of potential downside pressure.

This is a generalization, but the setups across these names are similar heading into earnings. That may change as the week progresses, but when the majority of options positioning is bullish going into results, it does not necessarily mean stocks are poised to rise — in many cases, it suggests the opposite.

Mike

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Glossary by ChatGPT

Delta: A measure of how much an option’s price is expected to change per $1 move in the underlying asset.

Gamma: The rate of change of delta, indicating how quickly option sensitivity shifts as the underlying price moves.

Implied Volatility: The market’s forecast of a stock’s future volatility, embedded in option prices.

Island Reversal: A technical chart pattern signaling a potential trend reversal, formed by a gap followed by opposite price movement.

Max Pain: The price level at which the greatest number of options expire worthless, often seen as a magnet for price action near expiration.

Out-of-the-Money Calls: Call options with a strike price above the current market price of the underlying asset.

Premium Decay: The loss of an option’s value over time, primarily due to time decay (theta).

Disclosure

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

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