Market Bottom, DeRisking, the Late Innings?

The De-Risking Sell-Off Is in Its Late Innings

Technical evidence is mounting that the worst of the selling is behind us—but the Middle East conflict remains the wild card that could change everything.

Let me be direct with you: I believe the equity market is more likely than not approaching a tradeable bottom. The technical evidence across multiple indicators—the VIX term structure, the Magnificent Seven correction, energy stock divergences, and historical geopolitical selloff patterns—all point to a market that is in the late innings of this de-risking event.

But I have to be equally direct about this: all of this analysis is contingent on the Middle East conflict not expanding beyond its current theater. If the war between the United States, Israel, and Iran escalates into a broader regional conflagration—particularly one that permanently disrupts the Strait of Hormuz—all bets are off. A prolonged oil shock above $100 per barrel would fundamentally alter the calculus for equities, inflation, and Federal Reserve policy. Wells Fargo has modeled a worst-case S&P 500 scenario of 6,000 in the event of a sustained Hormuz closure. That is a 12% decline from current levels. So keep that caveat front and center as we walk through the evidence.

With that said, 40 years in this business have taught me one thing above all else: markets reward those who stay rational when the crowd is panicking. Let’s look at what the data is actually telling us right now.

Signal #1: The VIX Curve Inversion — A Classic Late-Stage Indicator

The CBOE Volatility Index surged to 26.43 this week, its highest level since the tariff-driven panic last April. But the raw VIX number isn’t the real story here. The shape of the VIX futures curve is what matters—and it’s sending a signal that experienced volatility traders recognize immediately.

The spot VIX is currently trading approximately 4 points above the second-month VIX future. That is a full inversion of the term structure—what professionals call “backwardation.” This condition occurs less than 20% of the time since 2010, according to data from Cboe itself. It happens when near-term fear spikes so violently that traders are pricing in more risk right now than they expect two months from now. That 4-point inversion is the steepest since last April’s tariff selloff.

Here is the critical insight: VIX backwardation of this magnitude has historically marked the late innings of equity selloffs, not the beginning. The market is telling you that it expects volatility to decrease from current levels over the next 60 days. After the April 2025 tariff shock, the VIX curve inverted to similar levels and the S&P 500 proceeded to rally 16% during the following three-month recovery. After the 2018 trade-war inversion, long volatility positions paid handsomely as the spike reversed. Could the inversion deepen further? Absolutely—there is room for more. But when the curve reaches this degree of stress, history tells us we are far closer to the end of the selling than the beginning.

Signal #2: The Magnificent Seven Have Corrected and Stabilized

The Roundhill Magnificent Seven ETF (MAGS) is down approximately 7% year-to-date. That ETF actually peaked back in late October 2025, meaning these mega-cap tech names have been quietly correcting for over four months. This is not a sudden crash—it is a controlled, rotational de-risking that has already largely played out.

Consider the context: while the Mag 7 has drifted lower, the other 493 stocks in the S&P 500—what analyst Ed Yardeni calls the “Impressive 493”—are up 2.9% this year. The equal-weight S&P 500 (RSP) has surged 7.0% YTD. The Russell 2000 small caps are up 6.2%. This is a healthy broadening of the market, not a collapse. The rotation out of mega-cap tech into cyclicals, energy, industrials, and materials is exactly the kind of normalization that builds a more durable foundation for the next leg higher.

NVIDIA (NVDA) deserves special attention here. The stock closed Monday at $182.48, down roughly 12% from its all-time high of $207 last October. Yet despite the Iran-driven selloff, NVDA actually rallied 3.0% on Monday, bouncing off a pivot bottom that formed on February 27. Investors aggressively bought Nvidia and Microsoft during the Monday dip—cash-rich companies viewed as resilient to geopolitical disruption. Full-year data center revenue at NVIDIA reached $194 billion (up 68% YoY), and 95% of covering analysts maintain Buy or Strong Buy ratings with an average price target of $263.78. This is not a broken stock—it is a stock that has corrected to more realistic valuation levels and is now stabilizing.

Signal #3: The XLE/Crude Oil Divergence — Energy Stocks Can’t Keep Up

This is one of the most telling signals in the current market, and it speaks directly to how close we may be to the end of the fear trade.

On Monday, WTI crude oil surged more than 8%, closing at $72.74 per barrel after hitting as high as $78.27 intraday. Brent crude hit a 52-week high above $78 and pushed toward $84 per barrel on Tuesday. This was a legitimate supply-shock move driven by the Strait of Hormuz closure and Iranian Revolutionary Guard threats to fire on transiting vessels.

Yet here’s the critical divergence: the Energy Select Sector SPDR (XLE), despite crude’s massive surge, was unable to take out its 52-week high of $57.88 and then turned negative on Tuesday. The XLE climbed 2% on Monday, but pulled back approximately 0.4% on Tuesday even as WTI was still posting gains of nearly 5%. The ETF’s 52-week range runs from $37.24 to $57.88—it got close to the top of that range and failed.

What does this tell us? It tells us that the smart money is not chasing the energy fear trade. When crude oil rips 8% and energy stocks can’t hold their gains—when XLE can’t even take out its prior high—it typically signals that the market views the oil spike as temporary and geopolitically driven rather than fundamental. Additionally, XLE’s MACD turned negative on February 24, and it broke above its upper Bollinger Band on March 2, a technical condition that often precedes a pullback toward the middle band. The energy sector has already surged 27% year-to-date—much of the good news is priced in. This divergence between crude prices and energy equities has historically been one of the clearest indicators that the geopolitical risk premium is peaking.

Signal #4: The Historical Playbook Is Clear

Let’s look at what 85 years of market history tells us about geopolitical selloffs. Carson Group compiled data across 40 major geopolitical events since World War II. The results are remarkably consistent: on average, the S&P 500 loses approximately 0.9% in the first month following a geopolitical shock but rises 3.4% over the following six months. As Ryan Detrick, Carson’s chief market strategist, put it: “Historically, what in the near term seems like a geopolitical crisis tends to be largely resolved from a market perspective over the ensuing six months.”

Wells Fargo’s analysis is even more encouraging in the near term: the S&P 500 typically turns positive within two weeks of a major conflict and is higher by 1% on average three months out. Wells Fargo also notes that the S&P 500 rallied 16% during Gulf War I and 14% in the first three months of Gulf War II.

LPL Research’s historical analysis shows the average geopolitical selloff is approximately 5%, with markets typically bottoming in about three weeks and recovering within one to two months. We are now in week one of this selloff, with the S&P 500 down from its February highs to 6,816. If the three-week bottoming pattern holds, we could be looking at a tradeable low forming by mid-to-late March.

Signal #5: The Intraday Recoveries Are Telling You Something

Pay close attention to the intraday price action of the past two sessions—this is the fingerprint of institutional dip-buying.

Monday, March 2: The S&P 500 opened down 1.2%, with the Dow falling over 600 points at the lows. By the close, the S&P had recovered to finish essentially flat (+0.04%), the Nasdaq actually gained 0.36%, and the Dow pared its losses to just 73 points. That is a massive intraday reversal from the worst levels.

Tuesday, March 3: Even more dramatic. The S&P 500 plunged as much as 2.5% intraday, with the Dow cratering more than 1,200 points. By the closing bell, the S&P had recovered to close down just 0.94%, and the Dow limited its loss to 403 points. Nearly three-quarters of the intraday decline was bought back.

This pattern of sharp morning selloffs followed by aggressive afternoon buying is one of the most reliable hallmarks of a de-risking event nearing exhaustion. Weak hands are panicking at the open; strong hands are deploying capital by the close. When you see this behavior for two consecutive sessions, it suggests the sellers are running out of inventory.

Additional Technical Evidence

S&P 500 Support Levels: The index breached its 100-day moving average near 6,830 on Tuesday, which had served as reliable support throughout the 2025 bull run. The next major support zone sits at the 200-day moving average around 6,650. Importantly, the 200-day average is still 15% away for the semiconductor index (SOXX), and during last year’s tariff selloff, dips below the 50-day were short-lived with the 100-day holding as the ultimate floor. The S&P 500 remains just 1–2% below its all-time high—this is not a bear market; it is a correction within a bull trend.

Market Breadth Remains Healthy: While the cap-weighted S&P 500 has been flat this year (dragged down by Mag 7 weakness), the internal market tells a different story. Energy stocks are up 23.2% YTD. Materials are up 17.7%. Consumer staples are up 15.5%. Industrials are up 14%. This is broad participation across cyclical and defensive sectors—the hallmark of a durable market, not a fragile one.

The “Fed Put” Remains in Play: While rising oil prices could complicate the rate-cutting picture, the geopolitical crisis ironically reinforces the case for the Federal Reserve to maintain accommodative conditions rather than tighten. Rates are already at 3.50–3.75% following cuts in late 2025, and the 10-year Treasury yield briefly touched 4.10% before pulling back to 4.06%. The Fed has every incentive to support liquidity during a period of international crisis.

Wall Street Targets Remain Bullish: UBS reiterated its year-end S&P 500 price target of 7,700 even after the Iran strikes, representing 11% upside from Tuesday’s close. They expect “only minimal or a brief disruption to global energy supplies.” Evercore ISI raised its S&P 500 EPS forecast to $304 from $296 following the strong Q4 earnings season. Even Steve Eisman of “The Big Short” fame said he would not change a single trade because of the conflict, calling it “very, very positive” for markets long-term.

The Wild Card: If the War Expands, Throw This Analysis Out

I cannot stress this enough: the single biggest risk to every bullish signal outlined above is an expansion of the Middle East conflict.

Right now, the market is operating under the base case that this conflict will be contained—that the Strait of Hormuz disruption will be temporary, that Trump’s announcement of Navy escorts for tanker traffic will restore shipping, and that diplomatic talks will eventually de-escalate tensions. That assumption is baked into the price action.

But consider the downside risks: Iran’s Revolutionary Guard has vowed to fire on any ship transiting the Strait. Hezbollah has already attacked Tel Aviv. Drones hit the U.S. embassy in Saudi Arabia. Iran struck energy infrastructure in Qatar, forcing the first suspension of Qatari LNG exports in 30 years. Goldman Sachs estimates an $18 per barrel risk premium for a six-week Hormuz closure. Barclays has warned that a sustained closure could send Brent above $100—and possibly above $120 per barrel. UBS analysts warn that scenario would be a material disruption to global supply.

If this war expands into a multi-front regional conflagration—if oil sustains above $100 for weeks—then the stagflation scenario comes into play. Higher energy costs would feed directly into inflation, tie the Fed’s hands on rate cuts, and crush consumer spending. In that scenario, the 6,000 level on the S&P 500 that Wells Fargo has modeled as its worst case becomes a real possibility.

The Bottom Line

The weight of the technical evidence—VIX curve inversion at its steepest since April, Mag 7 correction stabilizing after four months, XLE failing to follow crude oil higher, powerful intraday recoveries from panic selling, healthy market breadth, and 85 years of historical precedent—strongly suggests that we are in the late innings of this de-risking sell-off.

As long as the Middle East war does not expand, the market’s historical playbook is clear: geopolitical selloffs create buying opportunities, not reasons to run. The S&P 500 typically bottoms within three weeks of a major geopolitical event and is higher three to six months later. We appear to be tracking that pattern.

My advice: stay nimble, keep your watch lists ready, and don’t let the headlines drive your portfolio decisions. The panic is doing its job—shaking out weak hands. When that process is complete, the opportunities for disciplined investors will be significant.

But keep one eye on that Strait of Hormuz. That’s the variable that changes everything.

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