Big Small-Cap View. War and pizza. The “Pentagon Pizza” index tracks late-night meal delivery to D.C. military planners and supposedly correlates with impending war activity. As of late, it’s been light (down to “Doughcon 4” as one site playfully calculates) though it seems that with the billions spent on defense and the importance of surprise in battle, one would think the brass would lay out the $50k for an in-house pizza operation. We shall see. But with prediction markets showing a majority saying Iran military operations will end by June, it’s hard not to ascribe some hope that the war is closer to its end than its beginning. Certainly, the sharply backwardated oil markets argue that the current state of affairs will not last. While we remain optimistic the war’s finale is near, the longer it lasts makes the event increasingly like a binary outcome. Too long and catastrophe could ensue regardless of the outcome. So far, small-cap earnings estimate revisions have been muted (see our latest earnings note) with large-cap estimates even higher since hostilities commenced. While war does not mean recession, this one’s worst-case potential impacts on energy and supply chains certainly do.
Pizza and prediction markets aside, what can help us decide? In short, technicals offer guidance. But I don’t remember a time when the technical picture disagreed this sharply with my macro view. Macro-wise, I see difficulties and rising recession risk that has not been discounted. But the technicals, even when I try to map the bear case, remain sanguine. The R2000 touching 2387 potentially completes a fourth wave correction with the RSI’s positive divergence offering confirmation. True, the index needs to overtake its 50 DMA and 2558 to sustain a higher probability of a rally reaching 3000. Failing to overtake 2558 followed by a lower low reintroduces 2100 as a lower bound downside risk should further damage be needed. But while the technicals favor a move higher in Spring, our non-technical outlook remains unsettled and more in agreement with Jim’s view for a choppy market. But maybe that just last night’s pizza talking.