Watch for this Iran-war signal before rushing to buy the dip in stocks, research firm says

• Trump looks like he's trying to engineer a TACO rally in stocks, but it may not be time to buy the dip.
• Investors should wait for Iran to signal it's ready to negotiate, BCA Research said.
• Iran is incentivized to keep the conflict going, possibly through the end of the week, the firm wrote.

Donald Trump has signaled the US-Iran war may be nearing an end, but the president's turnaround isn't quite the TACO moment in stocks that signals it's time to buy the dip, BCA Research said.

TACO — an acronym for Trump Always Chickens Out, referring to the president's tendency to push hard on his policies before softening his stance to appease markets — appeared to re-enter the conversation when Trump told CBS on Monday that the war with Iran was "very complete, pretty much."

US stocks quickly erased their losses for the day, with all three benchmark indexes ending the day higher, but investors need to wait for one more sign before they rush back into the market. That signal would be Iran agreeing to halt its attacks or come back to the negotiating table, Matt Gertken, the chief geopolitical strategist at BCA Research, said.

"President Trump said the war is 'pretty much' complete. But that is not enough," Gertken said, pointing to how Iran could have a higher tolerance for prolonged conflict than the US does. "The 'buy signal' will come when Iran, not Trump, agrees to cease attacks or negotiate. That could be this week or next week," he later added.

BCA, which has leaned bearish on markets in recent years, said it would remain overweight cash compared to stocks and bonds.

From a political perspective, Iran is incentivized to prolong the conflict in the Middle East, given the consequences of a longer war on the US, Gertken said.

In markets, the fear is that higher oil prices from an extended conflict could raise inflation while lowering growth. In the upcoming midterm elections, that could cause Trump to lose favor with voters, leading Democrats to take control of Congress.

That outcome would likely be more favorable to Iran, given that Democratic lawmakers have generally leaned away from war with the nation, Gertken added.

The most likely scenario is that Iran would escalate conflict "temporarily," Gertken said, such as by continuing to block the Strait of Hormuz, a key passage for global oil flows, through the end of the week before coming to the negotiating table.

For stock traders, that means disruption likely isn't over just yet. BCA estimated there was a 70% chance that conflict in Iran would escalate to a "massive oil shock," compared to a 30% chance that conflict would de-escalate from here.

"Iran is likely to issue a parting shot to demonstrate its prowess at home and abroad," Gertken said. "Hence the 'all clear' signal for investors, as opposed to traders, is not Trump's capitulation but Iran's."

In a note, strategists on JPMorgan's market intelligence desk also doubted that investors had the "All Clear" to jump back into markets. The president has sent mixed messages about whether conflict could continue through the week, and it's "unclear" if Israel is ready to walk away from the war, the bank wrote.

Mark Newton, a technical strategist at Fundstrat, also told clients it was "unclear" if the rally in stocks was strong enough to rule out future selling pressure later in the month.

"More will need to happen to expect the worst is behind us given no real indications of sentiment-driven capitulation," Newton said.

It's been a rough start to the year for investors, with the rally in stocks being tested by fresh geopolitical conflict and continued anxiety over the AI trade. The S&P 500 is down 1% year-to-date and, as of mid-February, was off to its worst start to the year in at least 30 years, according to an analysis from Goldman Sachs.