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There are many things happening at once, which is creating a fair amount of confusion in the market. As I noted around 6 or 7 AM ET, it was clear that even with oil up roughly 6–7%, the credit and FX markets were not overly concerned. This again points back to the framework I laid out a few weeks ago: this is ultimately about financial conditions. If financial conditions are not tightening, then the stock market can rebound. For now, financial conditions are not tightening.
Watching credit spreads is likely the most important signal right now. Even in 2023, credit spreads widened after oil prices surged.
Additionally, rates have stalled following a very large move, and as long as Treasury yields are not rising, financial conditions are not tightening. That could change, though. When looking at the 10-year Treasury, it is possible to outline a developing bull flag pattern. If that proves correct, the backdrop for equities would likely shift meaningfully. However, for now, rates remain highly dependent on the path of oil and inflation.
You can see something similar in gold, which appears to be forming a bear flag. The move in gold since late February also seems tied to rising rates — an observation that ultimately links back to oil.
So, if gold is forming a bear flag while rates are forming a bull flag, it suggests that we are currently in a period of consolidation in both rates and financial conditions as the market digests recent developments. If the bear flag in gold plays out, it would likely imply a move back below $4,000.
The same goes for the S&P 500, which is trading in line with rates. This again suggests that stock prices are not responding to the actual swings in oil prices, but rather to the financial conditions created by those moves.
For now, we can wait and see how things play out, but the 1966 analogue suggests this recent rally may end soon.
