NYSE traders

Market action is positive on Wednesday morning as hopes of progress in the Iran situation are increasing. Equities are up, oil is down, and interest rates are moving lower. The move is not euphoric, and a high level of caution remains, but it is solid and hopeful. If more positive news develops, it can gain meaningful momentum.

Mediators from Turkey, Egypt, and Pakistan are pushing to arrange a U.S.-Iran meeting within 48 hours but the disagreements are substantial. The U.S. has sent Iran a 15-point plan through intermediaries that requires dismantling nuclear sites and ending uranium enrichment on Iranian soil. Pakistan has offered to host talks and President Trump is pushing the idea on social media. Iran’s military spokesman responded by suggesting the U.S. was negotiating with itself to escape a strategic defeat.

Adding complexity, Saudi Arabia and the United Arab Emirates are lobbying Trump to continue the war, concerned that a premature deal would leave them with a hostile and still-capable Iran. The Pentagon is also contemplating deploying roughly 3,000 soldiers from the 82nd Airborne Division to the region. A decision to put boots on the ground has not been made, but the planning itself signals that the military options remain very much on the table.

There are a number of different agendas at work and that makes a clean resolution extremely difficult. The risk of setbacks remains high and that means the market will be jerked around with each new headline.

What to Watch For

The key development to monitor is whether fear of missing out begins to take hold. If positive news continues to build and investors begin to anticipate a resolution to the oil supply disruption, a risk-on dynamic can develop quickly. 

Once the Strait of Hormuz is fully reopened most other issues become secondary. The market will then be able to more clearly discount the ultimate impact of the disruption. Oil, and the inflation it drives, is the issue that matters most right now.

The complicating factor is whether Iran has been sufficiently weakened to no longer pose a credible threat. Trump is under pressure to declare victory and normalize the oil market, but the original objective of this entire operation was to incapacitate Iran once and for all. Israel and the Gulf states will need assurance that has been achieved before they accept any deal.

Game Plan

Volatility will remain elevated, and the market will continue reacting to each new piece of news. Fragile optimism is building, and the question is whether it can sustain itself.

My approach has not changed. Stay patient and avoid chasing positive headlines. Every bounce in recent weeks has been followed by a setback. 

What I am watching for is individual stocks that are holding support and developing consistent relative strength. Those are the names worth targeting. Stocks that are starting to show sustained positive action in this environment are most likely to lead when conditions finally improve in a durable way.

Related: The Sector Most Vulnerable to Higher Energy Prices Is Ignoring Higher Energy Prices

At the time of publication, Rev Shark had no positions in any securities mentioned.