Yesterday I shared my view of the S&P 500 through various historical comparisons, using analogs. There was plenty of 2010 in the charts but there were also threats of 2008 and other highly volatile periods in the markets over the years. I concluded with “The short-term argues we will have choppy markets, a major low and then a solid bounce. The longer term charts argue the same, except for Trump I’s period, 2017.” Monday was not much of a surprise in hindsight as our president forced the markets higher by offering a “way out” so to speak before the marines arrive on Friday.

Now shifting gears, another page that I review daily is my ETF sectors screen. It combines my chart techniques (that I have written into the program via Claude) with a macro regime that covers everything since the 1960s (also written with Claude). The main takeaway from this viewpoint is simple: they are mostly trending lower but not yet fully oversold. Yesterday I said we could bounce and then sell off. Perhaps they get fully oversold if/when we decline sooner than later?

From this page today, I found some interesting themes besides just commodities. First and foremost is the Behavior of the XLF.

Tight Money = Lower Banks

I realize that the analysis of the financials is not that simple but if you have read my notes in the past, you will know that I put much weight into the liquidity of the system. When it is rising, the banks are gaining access to more cash to lend or to buy assets. More money in the system lifts assets, which is no secret. The XLF has had a tough time of late and in simple terms, this has been tied to excess reserves in the system. When money stops rising and rolls over and the system also suffers stress (thank you war, credit, etc.), the banks end up suffering for it, down nearly 11% year to date. In fact, when the monetary base is expanding, the XLF averages +14% over the following year with a 74% win rate. When it is contracting, that drops to just +3%.

A Stressed Banking System creates a distressed consumer

Another ETF that has hit the skids this year is the XLY (Consumer Discretionary). Heading into the latest spike, the XLY was actually doing ok, rising, albeit in a choppy fashion as the price of energy remained in the doldrums. The threats of Crude breaking over the 65-week seemed to cause issues with the XLY only to be unwound and see the rally continue (will they or wont’ they attack Iran?). The latest decline began before the war began as the XLY started to roll as crude hit a low. It was a simple move by crude to climb, as I show in the next chart, but led to a significant decline from high to low in the XLY.

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It’s interesting how history repeats itself at key levels. This chart shows ranges that have been drawn over time for crude and the spike from the beginning of the current war was met and sold at the same levels as the spikes in 2022 as large amounts of liquidity created an inflation storm and excess demand for crude. So far following this spike, the crude prices have bounced around but with the most recent news, fell hard Monday into the 80s. What’s interesting about this move is the turn at 56 late in 2025… it was a solid turn on the candles and had been building momentum as if it sniffed out the current issues.

Spikes don’t matter, but perhaps your gas tank does

I ran several scenarios today regarding crude spikes and most market forecasters go back to the 1970s as an example of the Fed making things worse on the commodity front after spikes. But the variables right now are not arguing that the conditions support an inflation spike. In fact, if one looks at every spike over the past 45 years, the correlation between core inflation and these spikes is virtually zero (r = -0.03 across 42 spike episodes since 1983). Spikes in their nature tend to unwind because they are not gradual and many are late to the party with these things.

Looking at unleaded gasoline though does give another viewpoint that is troubling. As you can see from the chart, there really is no resistance up here and argues that it continues to climb at the moment (feed through from higher crude is delayed so it mechanically will climb) Crude has come off significantly from the highs but unleaded gasoline has not. Gasoline prices rising at this time of the year is not unheard of as we get closer to the driving summer but this level if sustains, could pose a real problem for the consumer and the economy.

Does gasoline sustain?

Much of this answer depends on the war but there is also an element of the financial system and global commodities. This chart of the CRB shows that the index just blew past the 1980 levels (as crude and gold were both climbing) as well as the 2005 high, which was the first wave higher for the commodity rally 20 years ago AND a spike high in the Chinese Shanghai Composite (hmm). If the CRB falls back below 350, I would be ready to say that commodities will not be an issue. If it sustains, cost pressures will rise and gasoline will remain in that upward window pushing the cost to drive higher.

So tight money, rising costs and lower wealth

While everyone is expecting the price of crude to continue to climb, if the biggest growth engine in the world slows (ie the American consumer), war in the middle east will not matter because demand globally will fall and when the war ends, the price of crude will collapse. The banks are telling us that the system is tightening and the way they are trading argues that demand domestically is falling. In my analogs note yesterday, I noted a bounce followed by further selling – the bounce comes on the end of the war and then reality hits 100 days after and markets correct.

The variables are showing this…is it too perfect? Perhaps but this is one scenario to consider.

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