As Danger of a Reversal Builds, This Is the Most Important Chart to Watch

Futures are mildly positive Friday morning ahead of the April nonfarm payrolls report. Oil ticked back up overnight after a U.S.-Iran exchange of fire in the Strait of Hormuz, but ticked back down after President Trump called the strikes "just a love tap" and said the ceasefire remains in effect. On a week-over-week basis, oil is meaningfully lower than the $106 to $115 range we saw Monday, and that has been a key tailwind along with AI strength this week.

Asian markets are down overnight, but U.S. investors have been optimistic about progress in Iran and that is keeping a bid under the market. This has been the pattern since mid-April. Headlines hit, oil pops, equities stumble, and within a session or two the market resumes its prior trend. That pattern is still in place, but it raises the issue of what happens when a deal is eventually made.

The Sell-the-News Risk on the Iran Headline

Investors have been stubbornly optimistic about progress in Iran, and events continue to unfold quickly. The risk is that the market has been pricing in a positive outcome for weeks and has now fully discounted the news. The danger of a sell-the-news reaction to an eventual "War Has Ended" headline is significant and growing.

The setup is similar to what we saw during earnings season in a number of cases. Good news that everyone is waiting for produces a celebratory spike followed by profit-taking, because the buyers have already bought and there is no flow to suck up the sell side. With the indexes hovering at all-time highs and the chip group parabolic, the risk of selling into a spike is amplified. The bigger and more anticipated the headline, the more vulnerable the possibilities.

The correct strategy is to not chase the celebration if it comes. A clean ceasefire announcement that produces a 1% to 2% gap up on Monday is more likely to be a place to take partial profits in extended names than a place to add. The trade was getting in front of the resolution, and by the time the headline hits, that trade is over.

If negotiations stall and the market gets a "talks have collapsed" headline, the initial selloff would likely be a buying opportunity rather than the start of a downtrend, because the bull case is structural and macro conditions have been steadily improving. Well-anticipated catalysts produce contrary reactions. The market rewards traders who position before the news and punishes traders who chase the news.

Earnings Season Is Almost Over

The other piece of timing to consider is where we are in the earnings cycle. Roughly 70% of the S&P 500 has reported, those reports are mostly in the books, and the only remaining major catalyst is Nvidia (NVDA) , which reports later this month. After that, we move into the back half of May with no significant earnings catalysts, no Fed meeting until June, and the start of the seasonally weakest stretch of the calendar.

The old saying is "sell in May and go away." However, that has not worked in recent years, and I am not going to argue that it is going to work mechanically this time.

Seasonality is a tendency and not a certainty, but that does not mean it should be ignored. The underlying logic of the saying is that the May-through-October stretch lacks the positive catalysts that drive the November-through-April period. That is factual and not just superstition. We are moving into that period with the indexes extended, the chip group parabolic, breadth deteriorating, and a 120-name new-low list that says the average stock is already struggling.

Seasonality is a more important issue because some areas of the market are already stretched. The bull case for the market assumes that earnings estimates for Q2 and Q3 will hold up and provide fundamental support as we move through a quiet period without earnings report catalysts.

As I said early this week, if we start to see EPS revisions move lower, that is the signal to be much more cautious. So far there are no signs of that occurring, but the absence of upside catalysts in the next several weeks will make it difficult for momentum to continue.

Payrolls Lead the Morning

The April nonfarm payrolls report is out at 8:30 a.m. Consensus is for a gain of 55,000 jobs, which would be a notable cooling from recent reports. The unemployment rate is expected to hold steady at 4.3%.

The reaction will tell us more about positioning and sentiment than about the underlying economy. A hot number complicates the Fed picture and pushes rate-cut odds further out.

FedWatch puts current 2026 rate-cut odds at 17%, hike odds at 14%, and the base case at roughly two-thirds for rates holding between 3.5% and 3.75% all year. Friday's number could shift those odds slightly but is unlikely to upset the consensus view that the Fed is on hold.

The 10-year Treasury yield has been a headwind since the war began, but rates are down this week in another sign of optimism about a positive outcome in Iran. That also increases the danger of "sell the news."

Where the Week Leaves Us

We are on track to end higher across the board, however, there are some warning signs to watch. Thursday's session was the first test of the rotation thesis, and the test was inconclusive. The chip leaders cooled and the broader market did not absorb the supply. The Russell 2000 went down with the indexes, breadth deteriorated to 38%, and the new 12-month low list expanded to about 120 names with the S&P 500 still close to all-time highs.

That divergence is what I have been watching closely. The bear case is that this pattern of narrow leadership combined with broad weakness underneath is a setup that historically precedes trouble. The bull case is that the macroeconomic situation is improving as Iran negotiations progress and oil drifts lower, but are investors being too optimistic?

Next week I want to see whether dip buyers show up in the secondary names. If they do, the rotation narrative is still alive and could gain traction. If they do not and the new-low list keeps growing, the broad selloff scenario takes the lead.

My Game Plan

The plan into a payrolls Friday with weekend headline risk is to stay patient. I am not adding aggressively into the report, and I am not chasing the rebound on a quiet pre-market. I have my eye on small-cap names that have just reported earnings and am looking for some opportunities to make partial buys and sells.

The bigger question, longer than a few days, is whether the average stock starts to play catch up or whether the divergence between the cap-weighted indexes and the broad market keeps widening.

The equal-weight S&P 500 (RSP) chart is the most important thing to watch. Friday's payrolls reaction will give us some movement to consider. The rotation thesis will be tested next week as small-cap earnings season ends and we see whether dip buyers show up where they need to.

At the time of publication, Rev Shark had no positions in any securities mentioned.