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Geopolitical events in the Middle East have been a dominant factor since the start of the US-Israeli-led military operation against Iran on Saturday, February 28. Oil and gas prices have surged on financial markets due to missile and drone attacks on energy facilities in the region, disruptions to maritime traffic and the effective closure of the Strait of Hormuz.
Nonetheless, the U.S. stock market has shown relative resilience, with major technical support levels yet to be breached, and actual and implied volatility still under control at this stage.
But it must be taken into account that the time factor is detrimental to the market. The longer high energy prices and transportation disruptions persist, the greater the pressure on equity risk assets.
Will the U.S. stock market, represented by the S&P 500 Index, enter a deeper correction? To answer this question, I will rely on technical analysis of financial markets, which highlights technical levels above which a break could constitute a red warning signal. Markets analyzed to accurately assess this technical risk include: the S&P 500 stock index, the VIX “fear” index, and institutional investor positions in S&P 500 futures contracts (COT reports) in order to evaluate institutional traders’ hedging strategies.
In short, the main technical factors are as follows:
• If the S&P 500 futures contract falls below support at 6,780, it will signal the first correction in US stocks.
• Data reported so far by the CFTC Commitment of Traders do not show an increase in hedging strategies by institutional investors. That could change if oil prices remain high for a few weeks.
• A significant move above the 29/30 level on the VIX would indicate a significant increase in strategies
Hedging downside risk for institutional traders. This is indeed a technical aspect that should be monitored closely.
• The table below reminds you of the top ten indicators of geopolitical pressure
In the current environment, the key to interpreting the market remains volatility dynamics. As long as the VIX index remains below the key 29/30 area, the general scenario remains that stock markets can gradually absorb geopolitical shocks without entering a stage of general panic. Recent history in financial markets shows that geopolitical events tend to trigger violent initial reactions in commodity and energy markets, but as long as implied volatility does not continue to rise, equity markets are likely to remain relatively consolidated.
The chart below represents the weekly Japanese candlesticks for the VIX Index
However, the main risk lies in changes in the volatility regime. If tensions in the Middle East continue for a long time, maritime trade is disrupted and energy prices rise for a long time, institutional investors may gradually strengthen their hedging strategies. Such a move would mechanically translate into a rise in the VIX and increase downward pressure on the stock indexes.
The chart below shows the weekly Japanese candlesticks for the S&P 500 futures contract.
Against this backdrop, the market may move from a simple technical consolidation phase to a true correction phase. Capital flows are likely to shift toward safe assets, while risk assets will be repriced to reflect geopolitical and energy risks.
The chart below shows the weekly Japanese candlesticks for the S&P 500 futures contract.
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