The Stock Market Limps Higher Even as Oil Prices Rise. Ilya Spivak is Still Short and This is Why

Key Concepts

• Momentum Divergence: A technical condition where price reaches new highs while momentum indicators (like RSI) fail to confirm, suggesting a potential trend reversal or exhaustion.
• Cost-Push Inflation: Inflation caused by substantial increases in the cost of important goods or services (e.g., energy, raw materials) where no suitable alternative is available.
• ISM Manufacturing PMI: A key economic indicator where a reading above 50 signals expansion and below 50 signals contraction.
• Break-even Inflation Rates: The difference between nominal and real interest rates, used as a market-based measure of expected inflation.
• "War Trade": Market positioning based on geopolitical instability (specifically the Iran-Strait of Hormuz situation), characterized by higher crude oil prices, rising interest rates, and a stronger US dollar.

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1. Market Performance and Technical Analysis

The S&P 500 continues a "slow but steady grind" to record highs, but the underlying technicals are concerning.

• Diminishing Volume: The recent leg higher has been accompanied by a steep decline in trading volume, indicating a lack of conviction.
• Negative Divergence: The Relative Strength Index (RSI) shows that while prices are hitting new highs, the momentum behind those moves is fading.
• Support Levels: The market is currently testing former resistance-turned-support levels. A break below these would suggest a shift in the current bullish trend.

2. The "Disconnect" Between Stocks and Other Assets

While equities remain on an "island" of optimism, other asset classes are pricing in a more hawkish, inflationary environment:

• Bonds (10-year note futures): Persistent selling and a rejection of recent range barriers indicate a market bracing for higher interest rates.
• Gold: Suffering from a "war trade" selloff; as a non-yielding asset, it is negatively impacted by rising interest rates.
• US Dollar: Continues to hug the top of its range, benefiting from the higher yields associated with the current interest rate environment.
• Crude Oil: Holding a "wartime floor" between $80–$85 per barrel. Despite speculation regarding a ceasefire in the Strait of Hormuz, no deal has been reached, keeping energy prices elevated.

3. Economic Data and Inflationary Meltup

The speaker highlights a significant shift in global manufacturing data:

• ISM & S&P Global PMI: Both reports show the strongest manufacturing growth since 2022. However, this is largely driven by "hoarding" and stockpiling inputs for AI data center infrastructure rather than end-user demand.
• Inflationary Pressure: The current environment mirrors the post-COVID "meltup" in inflation. The speaker argues that the world is moving toward an "overheating" state rather than a recessionary one.
• GDP Revisions: First-quarter GDP was revised downward (from 2.0% to 1.6%), with both consumer spending and business investment showing weakness. The speaker notes that the 14% of the economy dedicated to business investment cannot indefinitely outpace the 68% dedicated to consumption if both are hampered by high costs.

4. Monetary Policy and Future Outlook

• Hawkish Shift: The Federal Reserve is now pricing in a ~68% chance of a rate hike this year, a stark contrast to earlier expectations of 50 basis points in cuts.
• Upcoming Tests: The market faces critical tests this week, specifically the ISM Services PMI (a larger contributor to growth than manufacturing) and the US Jobs Report (expected to show 96,000 new jobs and a 4.3% unemployment rate).

5. Trading Strategy and Synthesis

The speaker maintains a macro-thematic portfolio aligned with the "higher rates/inflation" narrative:

• Short Positions: Gold, Bonds (via naked puts/put verticals), Bitcoin (put vertical), and major stock indices (call verticals on IWM, SPY, QQQ).
• Long Positions: US Dollar, Crude Oil (USO call verticals), Natural Gas (UNG call verticals), and Software (IGV call verticals).

Conclusion: The stock market is currently ignoring the signals sent by the bond, commodity, and currency markets. The core thesis is that the massive infrastructure build-out for AI requires energy and inputs that are becoming increasingly expensive. As these costs hit both consumers and businesses, the "disconnect" in the stock market is likely unsustainable, and the economy is trending toward an overheating, inflationary cycle that will force central banks to maintain a hawkish stance.