The Paradox of the Moment: Protect the Downside, Watch the Upside

Thoughts on the Market

Just over two weeks into the war, this conflict is increasingly revealing itself as one driven by unintended consequences. What started as a war against Iran is now evolving into something else: a war to reopen the Strait of Hormuz.

Ultimately, the oil has to keep flowing — otherwise the global economy starts to choke. As we said last time, the key thing to watch is whether markets begin pricing in a longer-lasting conflict. And unfortunately, that’s exactly what seems to be happening now.

Our first chart shows how the oil futures curve has shifted over the past two weeks. We plot the curve from the Friday right before the war began (February 27), from one week into the conflict, and from last Friday’s close. The lower panel shows the price change for each maturity since the war started.

What’s clear is that the curve remains in backwardation — meaning future prices remain noticeably lower than near-term prices, which tends to create a strong incentive to draw down storage. But at the same time, most of the 2026 maturities have moved higher again compared with last week.

A better way to see that the market is starting to price in a longer-lasting conflict is to look at how prices across the curve moved just over the past week. And the next chart makes it pretty obvious that this is exactly the kind of shift we were hoping not to see.

Backwardation is starting to flatten — which is basically the market telling us it doesn’t expect much relief anytime soon.

As a result, the rates market is getting repriced pretty quickly. Expected Fed cuts for 2026 have largely been pushed out, mainly because inflation expectations are moving higher again. At the same time, the oil spike that’s driving those inflation fears is also starting to feed into higher recession probabilities.

Put together, that’s pretty much the worst possible backdrop for risk assets — especially for our small-cap trade, which typically does best when financial conditions are easing and the economy is reaccelerating.

Like we said last time, things can still turn around quickly, even if that feels like the last thing that could happen right now. But either way, we think it’s time to draw a clear line for our riskiest trade. Given the obvious technical levels in the Russell 2000, we want to protect our capital if we see a weekly close below $245 in the IWM ETF.

That said, from a pure technical perspective, this still looks like a classic breakout-retest setup. But instead of just hoping it holds, we’d rather be prepared to step aside before this potentially turns into one ugly failed breakout from a 4-year base.

With the oil futures curve flattening at much higher levels, bonds getting repriced, and recession odds rising well off their lows, something interesting — even somewhat bullish — is starting to unfold.