Rising Rates and Weak Sectors Signal Deeper Market Trouble

The past two days have been rather confusing, with oil prices swinging wildly. The only real takeaway as of right now is that oil appears to have found support around its 20-day moving average. At some point, when the war premium fades and oil prices pull back, the question becomes how far they actually fall. My guess is that we probably don’t revisit the lows from before all of this started. There’s likely a new structural premium baked into the market now, given the event.

One thing I find really interesting is that the back end of the oil futures curve — specifically the December 2027 contract — is trading higher today than it did back in February 2022, when oil prices peaked. That may imply the market is pricing in structurally higher energy costs going forward. Something worth watching.

I guess the bigger question is whether a decline in oil prices would actually lift stocks in a way that lasts more than a few days. If you were to set the news aside and look only at the charts, I would say that something in the market has changed materially. The most obvious example is the 2-year rate, which has broken out higher. This is a setup that has been forming for months — well before anyone had a thought about a war between the US and Iran. The 2-year probably needs to consolidate around current levels, but based on the change in trend in the RSI, I would think the next move is higher, not lower.

Meanwhile, the software sector continues to perform horribly, falling sharply today. That weakness seems to be trading entirely independent of oil prices.

One can say the same thing about the private equity space. These issues started a really long time ago, as I’ve been noting for the last few months.

Financials have also been really weak, well before anything happened with the war.

And the S&P 500 itself has been in a distribution pattern for a long time, too. So whatever has been bothering the market started some time ago. Sure, I don’t doubt the indexes can rebound, but the technical charts alone don’t look good, in my view.

-Mike

Glossary by Claude

20-day moving average — A short-term trend indicator that averages an asset’s closing price over the past 20 trading days, often used to identify near-term support or resistance.
Futures curve — The series of prices for futures contracts at different expiration dates, which can signal whether the market expects prices to rise or fall over time.
RSI (Relative Strength Index) — A momentum indicator that measures the speed and magnitude of recent price changes, used to assess whether an asset is overbought or oversold.
Distribution pattern — A technical chart pattern where a stock or index trades sideways to lower as large holders gradually sell, often preceding a larger decline.
War premium — The additional cost embedded in commodity prices due to geopolitical conflict or the threat of supply disruption.

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