The Ceasefire Whipsaw: Why Relief Rallies Make the Next Selloff Worse
THE BRIEF
- Markets have now run the same script twice. Trump extends the ceasefire, equities rally to records, then Iran seizes ships in the Strait of Hormuz, and risk sentiment reverses within hours
- Each relief rally raises the baseline. When the S&P 500 closes at an all-time high on ceasefire news and then pulls back the next morning, investors register the move as a loss from the new peak, not a gain from the prior low
- This is loss aversion compounding in real time. Behavioral research consistently shows that investors weight losses roughly twice as heavily as equivalent gains, meaning the whipsaw pattern is psychologically more damaging than a straight decline of the same magnitude
- The practical danger is capitulation at exactly the wrong moment. Investors who held through the initial selloff, felt relief in the rally, and now face another reversal are statistically more likely to exit than those who never experienced the temporary gain
- For Canadian portfolios, the whipsaw is amplified by energy. TSX energy holdings gain in the down leg and give back less in the relief leg, but the headline index moves create anxiety that prompts calls regardless of whether a specific client’s holdings are behaving as intended
The ceasefire was extended Tuesday night. By Wednesday morning, markets had rallied to fresh records. By Wednesday afternoon, Iran’s Revolutionary Guard had seized two container ships in the Strait of Hormuz. The cycle took less than 24 hours to complete. Investors who felt relief on Tuesday are now managing a new round of uncertainty on Thursday, from a higher emotional baseline than they started the week.
This is not a market structure problem. It is a psychology problem, and it is one of the more precisely documented patterns in behavioral finance.
Why Relief Rallies Create Fragility
Loss aversion, the tendency to experience losses as roughly twice as painful as equivalent gains feel good, was first formalized by Kahneman and Tversky in their 1979 work on prospect theory. The key insight is that the reference point from which losses and gains are measured matters enormously. When a market rallies sharply to a new high and then pulls back, the reference point for investors who participated in the rally is the peak, not the starting point.
An investor who entered the current cycle at the pre-war baseline has a gain on paper. An investor who checked their portfolio on Wednesday evening, after the record close, and checks again Thursday morning is measuring from the record high. The pullback feels like a loss, because for the purpose of how the brain processes it, it is one.
The compounding effect matters because this cycle has now run twice. Each iteration anchors a new, higher reference point. Investors who survived the initial shock, held through the first relief rally, survived the next reversal, and rallied again to records are now carrying a more complex emotional ledger than anyone who simply missed the volatility. Their tolerance for the next down move is lower than it was in early April, not higher.
When Discipline Erodes at the Top
Research on investor behaviour during repeated volatility cycles consistently identifies a predictable failure mode: investors who hold through an initial decline and then experience a significant recovery frequently sell during the second decline at levels above their original entry point, locking in nominal gains while missing the subsequent recovery. The mechanism is simple. The first decline tests resolve. The recovery feels like vindication. The second decline arrives before the psychological account of the first cycle is fully closed, creating what researchers call peak-reference loss aversion.
The practical implication for Canadian portfolios right now is that Thursday morning is a more fragile moment than April 7 was. The clients who are most likely to call and request changes are not necessarily the ones with the most exposure to the conflict. They are the ones who experienced the full emotional arc of shock, relief, record highs, and renewed uncertainty, and who are now processing that arc as evidence that the situation is deteriorating rather than as evidence that their holdings have survived repeated shocks and remained near or above prior levels.
What the Pattern Actually Shows
Stripped of the emotional whipsaw, the data tell a more stable story. The S&P 500 closed at a record high on April 22. The TSX has recovered substantially from its worst levels of the conflict. Brent crude above $100 is a real inflation input, but it is also directly beneficial to the energy-heavy TSX weighting and to Canadian producers whose economics improve meaningfully at these price levels.
The whipsaw pattern is not evidence that the situation is getting worse. It is evidence that the situation is genuinely uncertain and that markets are processing new information in both directions with appropriate speed. A market that rallied to records and held there through continued Hormuz provocations would be the more concerning signal: it would suggest complacency rather than vigilance. The volatility is the market’s correct response to an unresolved risk, not a malfunction that requires a portfolio response.
Sources
CNBC, Yahoo Finance, NPR, Kahneman and Tversky (Prospect Theory, 1979), Behavioural Public Policy (Cambridge Core, April 2026), The Capital Process, HDQ analysis