In previous editions of Pretiorates’ Thoughts, we pointed to deeper stock markets, a higher oil price, and the danger of a war with Iran. Just two weeks ago, we told our readers not to write off the US dollar too soon. Now, many things seem to be moving in precisely this direction. However, these are the moments when one secretly hopes to have been wrong: our thoughts are with all those people who are directly affected by this escalating conflict.
And we are particularly concerned because we do not expect this war to be over in a few weeks. On the contrary, we believe there is considerable potential for escalation, especially as neighboring countries such as Bahrain, Qatar, the UAE, Saudi Arabia, Kuwait, and now even Turkey are being drawn into the conflict. And the starting point is a regime that wants to survive at all costs—and a president who sees his reputation at stake. Not much room for compromise. There are also initial indications that the peoples—not the governments—of the Middle East are suddenly sticking together.
However, the markets have so far shown only moderate nervousness in view of this risk of escalation. In fact, many investors may have been surprised by the movements in the stock, commodity, precious metals, and currency markets. We want to devote today’s thoughts to this very phenomenon – because on closer inspection, many of these movements are entirely explainable – with the right tools.
The possibility of a conflict between the US and Israel on one side and Iran on the other did not come out of the blue. Accordingly, we already pointed out in an earlier issue that there is a net short position in the S&P 500 Index futures contracts. As mentioned at the time, these could either be genuine short positions or hedges used to protect portfolios against possible turbulence.
In fact, the correlation between hedge fund positions and the S&P 500 Index shows that hedge funds have taken a clearly negative position on the stock market in recent weeks for the first time since December 2024.
Investors working with call and put options also showed a remarkable pattern: they bet heavily on falling markets with put options. The ratio of calls to puts has never been as heavily weighted toward puts as it is now in the last 15 years. It seems clear that the more intensively investors prepare for a correction, the less frantically they need to react when it actually occurs. In other words, those who are already hedged need to sell less panically in an emergency – and that is precisely why the selling pressure has remained surprisingly moderate for many market participants so far.
Our “Smart Investors Action” indicator has reacted accordingly. This measures the activities of particularly experienced, “smart” market participants behind the scenes – i.e., those players whose behavior is not always immediately reflected in pure index movements. If the light blue area is above the center, accumulation is taking place in the background; if it is below, distribution is taking place. The red areas indicate exaggerations – and especially when they occur together with the yellow “strong action” points, a counter-movement almost always follows. This is exactly what we saw to an extraordinary extent this week – a classic recipe for strong counter-reactions…
The ratio between the discretionary and staples sectors has also fallen significantly in recent weeks. The discretionary sector includes cyclical industries such as luxury goods and automobiles, while the defensive staples sector includes goods that are essential for everyday life. The trend in this ratio therefore clearly shows that investors have recently been increasingly seeking defensive stocks – a typical sign of risk-off mode. However, the ratio has now reached a level at which trends often come to an end. As with the previous chart, this signal can also be interpreted as a confident indicator for the medium term.
The US dollar is still considered a classic safe-haven currency in uncertain times – even if many no longer want to admit this. But it has proven its strength once again in recent days. The long-term strength index is also pointing upwards again. And precisely because the US dollar is considered a safe haven in turbulent times, Wall Street usually comes under pressure at the same time – because a stronger dollar is often the result of less relaxed times.
By contrast, little tailwind is currently to be expected from the second major currency, the euro. Unfortunately, Europe is increasingly finding itself in a structural losing position: politically, economically, and socially, many countries on the old continent are showing clear downward trends, while convincing signs of reform have so far failed to materialize. If there are no signs of improvement soon, capital is likely to increasingly seek a new place. For big global capital, the US dollar remains one of the few real alternatives. In any case, the corresponding indicator already points to upcoming weakness.
Many investors may also have been surprised by the sometimes extremely volatile movements in precious metals – especially by the fact that they have not been able to profit more strongly from them so far. On the one hand, the stronger US dollar is naturally acting as a headwind. But stock market history has shown us this pattern many times before: when the bears take control of Wall Street with force, investors first sell what is most liquid – and above all, what they still have profits on. This often includes gold and silver, as is currently the case. We saw exactly this behavior during the 2008 financial crisis, as well as in March 2020 when the pandemic broke out. Afterwards, however, precious metals were among the big winners – and the chances are good this time too: despite high volatility, the strength indicator has risen again in recent days.
No one can seriously predict how the conflict in Iran will develop in the coming weeks. We have already mentioned our thoughts on this at the beginning. However, the most important indicator remains the price of oil – and thus, in particular, the Strait of Hormuz, through which around 20% of global oil and gas exports are transported.
If the WTI oil price rises sustainably above the $80 mark, a scenario we described a few months ago could become reality: in major commodity cycles, sensitive precious metals often rise first, followed by the oil price, then industrial metals and fertilizers – and often soft commodities at the end. The correlation between the gold price and the oil price, which is shifted by twenty months, is remarkably high. And yet there is potential to catch up.
Bottom line: Of course, we would like to see geopolitical calm return to the world soon and no further escalation. Realistically, however, we must expect the coming weeks to remain rather turbulent. Accordingly, the stock markets are likely to continue to react nervously. The side show of gold and silver remains a tug-of-war between physical demand and paper markets for the time being. The US dollar may benefit in the long term thanks to capital flows from Europe. But the real conductor of this geopolitical orchestra is currently sitting in the oil market.
