5 red flags to watch that signal the Israel-Hamas conflict is causing market panic

• A breakout of war between Israel and Hamas over the weekend led to more uncertainty for the stock market.
• DataTrek Research said there are important indicators to watch as the market remains in a bottoming process.

The breakout of war between Israel and Hamas over the weekend led to a surge in volatility for stocks and commodities.

The conflict is yet another risk investors must monitor as the stock market continues to work through a bottoming process, according to DataTrek Research.

"Markets have been caught off guard by this weekend's events in Israel and Gaza... US equities have been under pressure since their July 31st highs, almost entirely because of higher interest rates. Now we have another issue to contend with, one that was not well understood just 72 hours ago," DataTrek co-founder Nicholas Colas said in a Monday note.

He laid out a volatility checklist that investors can watch to see if risks in the market are escalating, or if they're cooling down.

1. Crude oil prices

DataTrek is monitoring whether WTI crude oil prices rise above $93.68 a barrel, which is their 52-week high set on September 27. On Monday, they were at $86.55. The big risk is if Israel discovers that Iran played a role in the attack by Hamas. If so, Israel could respond militarily.

"At the very least, any warming of relations between Iran and the west is now on hold and this will limit incremental oil supply," Colas said. "Adding to uncertainty is the fact that the US Strategic Petroleum Reserve is at a 40-year low. The bottom line is that while neither Israel nor Gaza are major oil producers, everything that happens geopolitically in the Middle East invariably ends up affecting oil prices."

2. Treasury yields

"Ten year treasury yields hit decade-plus highs on October 3, at 4.80%... If they decline noticeably... it will tell us that markets are worried higher oil prices will cause a US/global recession. If they rise, it says that any oil price spike will not be enough to cause an economic downturn and will, instead, foster more inflation."

The US bond market is closed Monday, and the 10-year yield ended Friday at 4.795%.

3. Fed funds futures

Fed funds futures are currently suggesting the next few interest rate decisions into 2024 are essentially a coin flip.

"We expect to see lower odds of another 2023 rate hike on Monday given incremental geopolitical uncertainty. The same goes for 2024 rate policy probabilities, with rate cuts more likely," Colas said.

4. Gold prices

"Gold should rally, even with dollar strength, but we doubt it can get back to its 1-year high of $2,056 per ounce set in early May 2023. Our bullish view on gold is predicated on persistent non-US central bank buying, not on geopolitical uncertainty."

Any significant rise in gold prices would suggest that investors are taking the risk of war between Israel and Hamas seriously, he added.

Gold rose 1% to $1,865 per ounce.

5. The VIX

After briefly rising above the 20 level last week, the stock market's fear gauge later retreated and remained below 19 on Monday despite an uptick.

"There is simply too much uncertainty to think asset prices can quickly discount the most probable outcome just yet... Bottoming is a process... While we continue to believe US stocks will rally later this year, it feels too early to call the turn," Colas said.