Markets signal that stocks are on solid ground, Todd Gordon says
Markets continue to attempt to price in peace in the Middle East, but then a re-escalation of the conflict pushes back on that narrative and markets retreat, looking for a reliable theme. We’re going to look at the hard right edge of the key charts that are trying to discount the expected outcome of this conflict. This is no easy task, as this market in a nutshell is violently reacting to headlines, but structurally positioning itself for a final resolution. We’re going to layout the relationship between two key sectors that we’ll need to see before I think we can finally hang our portfolio hats on a resolution that will reward the CNBC Pro subscriber who is properly positioned. President Trump declared a deal with Iran “largely negotiated” over the weekend, saying an announcement to reopen the Strait would be announced shortly. As a result, crude oil plummeted and stocks rallied. But then Monday night saw fresh U.S. strikes on Iranian vessels in the strait. Where markets have been Before we look to the present and future, let’s remind ourselves of the history and how markets reacted. WTI crude was trading with a 5-handle (in the $50s) at the start of the year with the volatility index (VIX, orange overlaid), in the comfortable mid-teens. Nuclear talks in Geneva collapsed in February and both crude oil and volatility began to climb. The launch of Operation Epic Fury came Feb 28, followed by the death of Iran’s supreme leader, Khamenei. A few days later, on March 2, the Strait of Hormuz was closed. March 4, tanker insurance policies were canceled and the International Energy Agency called it the “greatest global energy security challenge in history.” In April, multiple talks and a conditional ceasefire were traded, and crude oil and the VIX declined into May. The correlation of crude oil prices and the volatility index during the Iranian conflict is unmistakable. One divergence that’s quite notable is the VIX making a new low below the April lows, as crude oil is still making a higher low. At this point it’s not clear who the leading market is and who the following market is — VIX leading WTI or WTI leading VIX. Oil may plummet But if I had to guess, I think the VIX is making a strong suggestion that equities are in very good shape (no doubt largely a result of strong earnings), and if a resolution is near I expect crude oil to plummet into the $80s and possibly $70s. In other words, from an equity investor perspective, VIX is trying to influence WTI lower. Both are bullish for the S & P 500, which happens to be melting HIGHER. And what makes this story even more interesting is if you walked past my old office on 44 Wall St and asked traders on the street which sector is up the most year-to-date I bet the majority would say technology. But it just ain’t the case. As I type furiously here on Tuesday, energy is higher 32% and technology better by “just” 29%. By comparison, the S & P 500 is up 10.5% after being down about 6% on the year. The takeaway for CNBC Pro subscribers is the growth/AI trade is ripping higher, with energy still above technology almost halfway through this year and a deal not yet finalized. Reports suggest the two sides have only reached an understanding on a framework to reopen the shipping lanes. And even if a deal holds, Saudi Aramco CEO Amin Nasser warned that global oil supplies might not normalize until 2027 if the Strait remains disrupted even for a few more weeks. To continue to try to answer the question of whether or not a reliable deal is on the horizon, look at the hard right edge of the JETS ETF chart. Airlines were among the hardest hit as the Iran conflict escalated. Delta Air Lines , United Airlines and American Airlines all dropped sharply with airspace closures, thousands of flights canceled daily and the margin-destroying impact of higher jet fuel hitting the ETF. Fast forward to today and we see a bullish signal of JETS breaking above April highs, confirming where the S & P 500 is currently trading, as WTI is still well off, yet above, the April lows of approximately $83 a barrel. JETS is trying to convince WTI to have a look in the $80’s somewhere. Coming full circle with energy ( XLE ) actually performing better year-to-date compared to technology ( XLK ), the weekly ratio of XLK/XLE shows a very interesting juncture where some major decisions will be made. If the ratio breaks higher, through the black dotted down trendline, the question of which sector has the advantage heading into the back half of 2026 will finally be answered — technology. We’ve been overweight energy holdings in our portfolio, but based on this possible price development we’ll begin scaling back our overweight status of energy and increasing our allocation in technology confirming the message VIX and JETS markets are giving to crude oil in the 90’s — it’s too expensive. — Todd Gordon, Founder of Inside Edge Capital, LLC We offer active portfolio management and financial planning for retail investors, as well as regular market updates such as the idea presented above. DISCLOSURES: None. (Charts shown are Koyfin and TradingView) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. 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