The trading logic under the unsolvable Iran War: sell at the rebound.

The Iran war has continued to affect the volatility of the stock market. Influenced by signals of easing tensions between Trump and the Iranian president, the US stock market experienced a brief rebound on March 31st. However, analysts point out that this is only a short-term rebound driven by news and is difficult to sustain, instead presenting a selling opportunity. Market Rebound Financial analyst Damir Tokic has been warning that holding macro bearish positions in the S&P 500 index in this news-driven market is dangerous, as the stock market now affects national security and is vulnerable to squeeze rallies. On March 31st, the Nasdaq 100 index rebounded by nearly 4%, while the S&P 500 index rebounded by nearly 3%. The triggering factors were: Trump signaled that he might be willing to end the war without requiring the reopening of the Strait of Hormuz, and the Iranian president stated that Iran would consider ending the war conditionally, but needed guarantees. Both types of statements have been made before, but the market still sees them as reasons for the rebound. Therefore, this rebound will be short-lived, providing a selling opportunity with lower squeeze risks. Technically, the rebound may extend to the 200-day moving average resistance level. Nightmarish Escalation Scenario Here is the macro backdrop of the Iran war: - The Strait of Hormuz is nearly closed, preventing 20% of the world's oil, as well as natural gas, fertilizers, and other products, from passing through. - As a result, the global economy is facing supply-driven oil price spikes. - Meanwhile, energy infrastructure in the Gulf Cooperation Council (GCC) region has been damaged, meaning that even if the war ends, the medium to long-term impacts will continue. - It is worth noting that further escalation could prompt the Houthi rebels to close the Mandeb Strait in the Red Sea, further reducing oil supply. From a macro perspective, rising oil prices will trigger inflationary shocks. As a result, if inflation soars, the Federal Reserve may be forced to hike interest rates, causing the yield on the 10-year US Treasury bonds to spike. The combination of rising oil prices, generalized inflation, and higher interest rates is likely to lead to a global recession (stagflation). The recession spurred by rising interest rates will trigger: 1) a burst of the real estate bubble; 2) private credit defaults evolving into a systemic credit event; 3) forced contraction of AI capital expenditures, causing the AI bubble to burst. In this nightmare scenario, the S&P 500 index could fall by over 50%, similar to the bear markets of 2000 and 2008. The Trump administration is clearly aware of this scenario and is actively seeking a way out before a crisis erupts. Endgame Options So, what are the options to break free from this predicament before a financial crisis erupts? Analysts believe there are the following options: Option 1: Negotiate an end to the war Currently, negotiations are ongoing with a deadline set for April 6, which is the last date determined by Trump. The US has presented a "15-point plan" to Iran, which has been rejected by Iran; Iran has provided a "5-point plan" to the US to end the war. Iran's demands include: 1) a comprehensive cessation of attacks on Iran; 2) providing enforceable guarantees to ensure no future aggression; 3) payment of war reparations; 4) ending the war in the entire region; 5) recognizing Iran's sovereignty over the Strait of Hormuz. Key US demands include: 1) immediate reopening of the Strait of Hormuz; 2) permanent commitment to never develop nuclear weapons; 3) termination of all uranium enrichment activities in Iran; 4) transferring existing enriched uranium stocks to the International Atomic Energy Agency (IAEA). Trump seems willing to abandon the demand for the Strait of Hormuz and the nuclear requirement (publicly stating that the goal of controlling Iran's enriched uranium has been achieved even if actual control is lacking). Therefore, ultimately, the decision to end the war lies with Iran. Iran seems to be seeking assurances for ending the war, which is the main sticking point. These assurances may require the signatures of nuclear powers such as Russia and China, and may also require the US to abandon its military bases in the region. Iran does not want to face new attacks after a ceasefire. Therefore, these assurances must be strong enough. However, the US cannot abandon its military bases in the region because the responsibility of the petrodollar is to protect regional allies. Israel also would not allow Russia and China to provide assurances because Iran still possesses enriched uranium. In the coming days, these assurance terms are unlikely to be agreed upon, so negotiations are likely to fail. Option 2: Freeze the conflict and voluntary action If negotiations fail, the US can unilaterally cease bombing Iran, and pressure Israel to also halt bombings, essentially freezing the war. The hope is that Iran will also cease bombing Israel and regional countries and gradually reopen the Strait of Hormuz under the influence of China. However, this situation will bring: 1) the Iranian regime continuing to rule, with even more radical leaders; 2) Iran gaining control of the Strait of Hormuz; 3) Iran gaining time to rebuild its ballistic missile program; 4) Iran being motivated to accelerate its nuclear program to form a deterrent. This seems to be the direction Trump is currently leaning towards, but it is clearly not a solution. Freezing the conflict will mean the continued closure of the Strait of Hormuz, with hopes of "other countries" helping to reopen it, or hoping that Iran will reopen it under Chinese pressure. Option 3: Military failure - further escalation Therefore, the only remaining option is a ground invasion, seizing Iran's crucial energy assets, finding enriched uranium, and pushing for regime change. The problem is, this option is likely to result in significant casualties, and pose the nightmare scenario described for the financial markets. The US seems unable to bear the political and economic costs of this option. The question is, if the cost of a ground invasion is "too high," will Trump extend the war for another 2-3 weeks before freezing it, and what is his true intention? Market Impact Analyst Damir Tokic states that the situation in Iran is indeed a mess, with no easy way out. In fact, there is currently no viable solution to end the war. The situation seems to be heading towards freezing, with Israel being the biggest loser as Iran appears to be more strategically powerful than before the war. If the conflict is frozen: 1) WTI crude oil is likely to remain in the range of $90-100 per barrel, as the Strait of Hormuz may remain partially closed, requiring transit fees; 2) inflation will continue to rise, the Federal Reserve will be unable to cut rates, and the 10-year US Treasury yield may remain in the range of 4.3%-4.6%, a level sufficient to dampen the real estate market. After the current rebound, the stock market will have to deal with the uncertainty of the war in the next 2-3 weeks, followed by private credit defaults and the bursting of the AI bubble, along with the pressures of high oil prices and high interest rates. Economic data are likely to show moderate stagflation characteristics, with weakening labor markets and persistent high inflation. Therefore, the macro environment will be relatively weak, and the selling pressure in the current S&P 500 index is likely to continue, with a potential drop of up to 20%. The downside risks of this outlook are significant. Israel is unlikely to accept a frozen scenario, and the situation may eventually escalate once the US and Israel rebuild their intercept missile stockpiles. The greater risk is that Iran will not accept freezing, but instead continue to bomb regional countries and Israel, leading back to a nightmare scenario: oil prices soaring to $200, and a significant stagflation shock to the global economy.