If you went on a tropical island vacation last week, to one of those places with no phones or internet, and you got completely unplugged from the world and came back and looked at the markets, you would have likely thought it was a very boring week, without much change. The was down all of 6.73 points (-0.1%), but there was a lot of action, up and down, all week. Every single day, there were 100-plus point swings in – sometimes in both directions, if you count the overnight trading hours.
None of this is normal and these swings may be related to Iran. The short squeeze on Friday is due to the fact that the U.S. and Iran agreed to talk this week, suggesting no attacks were imminent over the weekend.
If the Iranian situation is indeed resolved without a military conflict, the market is likely to rally due to good earnings and good overall economic numbers. If we witness the start of an ugly tit-for-tat exchange of fire, we may see an intermediate-term correction, simply because of the , which is likely to spike further, and there is also the potential for an increase in regional instability.
To be honest, there’s no telling which of those options will happen, although I have to point out that the U.S. and Iran were negotiating on the nuclear program issue when the U.S. bombed their nuclear sites, so the negotiations didn’t mean much. The U.S. military buildup continued over the weekend, and we could get more clues about whether those negotiations mean even less this week.
In case of a skirmish, I’d say the market response would directly be related to how high the price of oil goes and how long it stays there. Oil was down last week, but it remained basically inside the range of the prior week. The chances of the U.S. attacking Iran are now better than 50%, simply because the Iranians will not disarm – which is a basic U.S. demand – even if they give up their nuclear program.
This means the chances of the S&P 500 staging an intermediate-term correction to the vicinity of its 200-day moving average are better than 50%. The trading in S&P futures last week on Thursday night and early Friday was quite dramatic, and the huge gain on Friday does not tell the whole story. While the cash market was up 134 points, futures reached an overnight range of 214 points, reflecting a big decline before the rally.
S&P 500 futures traded below their December 2025 lows, which is meaningful. It would be even more meaningful if they closed below support levels sometime in February. While the “January indicator” was positive, suggesting an up market in 2026, the “December low” omen is not as well known. It basically says: Taking out the December low in the first quarter suggests the onset of a much deeper correction.
The “December low omen” played out last year when we took out the December 2024 low in early March 2025 and then had a rare 20% decline in the S&P 500 (outside of a recession) due to the aggressive nature of tariff negotiations. It is futile to estimate ahead of time how big the decline would be if an Iranian war begins, other than to say it is proportionate to how fast the price of oil rises and how long it stays there, which makes a retreat to the S&P 500’s 200-day moving average (blue line) a higher probability event.
I do not believe a Venezuelan scenario (brilliantly executed) would work with Iran. I don’t see how regime change can be executed without boots on the ground. I can see how there may be fair elections in Venezuela at some point, resulting in regime change, but I have a hard time seeing this happening in the “Islamic Republic” of Iran, where religion is not separated from the government.
To recap, no war in Iran means fresh all-time highs for the S&P 500 in the first quarter, while a real military conflict means a deeper correction. Given the continued buildup of U.S. military assets in the region over the weekend, it looks like the chances of a military confrontation are now better than 50%.
