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“The hardest hits are yet to come from the U.S. military,” – Marco Rubio, US Secretary of State

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Futures are off their overnight lows, but the optimism from the close yesterday evaporated quickly. The S&P 500 is indicated to gap down 1.4% at the open, while the Nasdaq will open down closer to 2%. These are even larger downside moves than at yesterday’s open!  Treasury yields continue to move higher as the 10-year yield is back to 4.10%, and oil is on pace for its second day in a row of 6%+ gains. Unlike yesterday, though, there’s been no bid for gold or other precious metals as they’re all sharply lower. Bitcoin is also down 3%.

In Asia, markets are lower again this morning as the Nikkei fell 3.1%, China was down over 1%, and South Korea, after being closed on Monday, tanked 7.2%. It’s the same sea of red in Europe as well. The STOXX 600 is already down 3% on the day, on some of the most negative breadth we have seen in quite some time (24-1 to the downside and every group is down over 1.55%). As bad as US futures look this morning, the losses are a scratch relative to the gash in international markets.  From an energy perspective, the US is much more insulated than the rest of the world is to Middle Eastern oil and gas. Therefore, the longer the conflict drags on, the more US assets should catch a bid, at least on a relative basis.

After an impressive turnaround from the morning lows yesterday, the ink was barely dry on the closing prices for the day when US Secretary of State Marco Rubio briefed the press with a statement that included the quote above. That, along with Iranian drone attacks on the US embassy in Riyadh, comments from the IRGC that the Strait of Hormuz was “closed” and any ships that attempted to traverse through it would be set ablaze, and a directive from the State Department for all personnel in Bahrain, Iraq, and Jordan to evacuate those respective countries, has caused a sharp reversal in sentiment as to the scope and duration of the current war situation in the Middle East.

At points yesterday, there was growing confidence that the operation against Iran would be quick, but this morning, we’ve seen some warnings from analysts that it already looks as though the US is getting involved in a prolonged quagmire (even though it hasn’t even been four days to this point). The next several days promise to feature multiple swings in sentiment as the situation unfolds, but remember this: no one knows exactly how this will all play out. The comments from Rubio above and the ones from the IGRC regarding the Strait of Hormuz sound dire, but what else do you expect them to say in the middle of a war?

We’ve only had one day of trading since the war began, and already the market action has been a roller-coaster. After gapping down more than 1% at the open yesterday, the SPDR S&P 500 ETF (SPY) bounced throughout the trading day to finish marginally higher, in what was only the 60th time since its launch 33 years ago that the ETF gapped down at least 1% and finished the day higher. With futures trading sharply lower again this morning, SPY is on pace to gap down more than 1% again today, and of those 59 prior reversals, SPY only gapped down more than 1% the following session six other times

This type of volatility only occurs under one condition – massive uncertainty. As shown by the red dots in the chart, the prior back-and-forth reversals were in December 2002, coming out of the dotcom bust, late 2008 following the collapse of Lehman, January 2022 when inflation started to spike, and last April during the tariff-tantrum. What’s somewhat unique about the current period, however, is the level of the VIX. In the six prior occurrences, the average level of the VIX was 40, and it was never below 30. As of this morning, the VIX is trading just under 26. Also, while the S&P 500 remains close to 52-week highs, all of the others, except the one in January 2022, occurred closer to 52-week lows.

While these types of reversals have been rare for SPY, the Nasdaq 100 is inherently more volatile, so it shouldn’t come as a surprise that they have been more common in QQQ. Today’s reversal will be the 19th such reversal. As shown in the chart below, most of these reversals occurred during the dot-com bust, with 12 between the March 2000 peak and the October 2002 lows. As the Nasdaq has ‘matured’ since then, occurrences have been much less frequent, with three during the financial crisis, one in early 2019, another in January 2022, and most recently in April of last year.