Sentiment Reset, Breadth Reload

Thoughts on the Market

We’re back from a refreshing spring break and hope you’ve been soaking up the longer days and fresh air too.

Since our last note two weeks ago, markets have drifted higher, but that quick 2% dip in between actually told us a lot about how sentiment is behaving under the surface. Even with a few bumps along the way, the market has stayed pretty resilient overall. That’s why we’re still leaning constructive here and continuing to look for opportunities on the long side.

There’s a lot to unpack today — so let’s dive right in.

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First off, a quick look at our Cheat Sheet shows our main stress indicators are still behaving fine, even with oil recently chopping around $100. And with this week’s sharp move lower on potential deal headlines, that backdrop looks even more contained.

Outside of the Dollar Index catching a bid lately — which can happen for a bunch of reasons that aren’t necessarily risk-off — both high-yield credit spreads and the VIX continue to reflect bull market conditions.

Now, a lot of investors have been struggling with the idea that credit spreads can keep tightening and stocks can keep grinding higher even with crude oil elevated. But a better way to look at it is to focus less on headline futures and more on spot prices — the actual physical price of oil that reflects real barrels in the system.

That’s where Dated Brent comes in. And what stands out in the chart below is pretty simple: prices have been making lower highs since peaking back in early April around $145. That matters, because a lot of the upside in oil was driven by supply disruption, meaning the chart below is essentially nothing else than a gauge on real oil-market tightness.

So right now, the message is pretty straightforward: oil conditions have been loosening for nearly two months now. And that goes a long way in explaining why markets have mostly shrugged off recent war headlines.

That obviously can’t really be said about Treasuries, which were at the center of the latest fear episode after yields spiked — with the 30-year getting most of the attention as it pushed back above 5% and briefly hit levels last seen in 2007.

But here’s the key point we keep coming back to: