Peace talks with Iran have broken down, and the Strait of Hormuz remains blocked. Oil prices are surging again, pushing inflation higher. That’s causing consumer confidence to collapse.
But you wouldn’t know any of that looking at the market. The S&P 500 was recently back within a whisker of its all-time high.
The disconnect is making me wary… That’s why I’m running a tight ship, managing a handful of positions.
But many retail investors seem to think the worst is now behind us and it’s time for their “buy the dip” and “never sell” approach again. That’s a problem…
Markets can reward bad behavior… right until they don’t.
After the U.S. and Israel attacked Iran, it took a month for the S&P 500 (SPX) to reach its March 30 low.
Yet in just nine trading days, SPX broke back up through 6878 – the level it closed at the day before hostilities broke out.
You don’t need to be a market expert to know that this is unusual behavior. Markets typically drop fast in times of turmoil as investors panic. They take longer to recoup those losses, as investors climb the “wall of worry.”
But the recent price action has flipped that pattern.
Even crazier, the S&P seems to be ignoring the prevailing macroeconomic conditions. Monthly inflation just jumped to its highest level since June 2022. Oil has gapped higher, pushing back up toward $100 off the back of the failed peace talks.
And there’s just no telling how long the Strait of Hormuz will be blocked or whether President Trump’s plan for a U.S. blockade will work… Many factors are still up in the air. Yet folks are piling back into the market without considering the risks.
That’s why I’m urging caution…
When the market is rising, it’s easy to get lulled into a false sense of security.
But right now, the price action doesn’t reflect the underlying economic reality. That reality will eventually teach some painful lessons.
It’s not pessimistic to note that there’s a lot that can go wrong right now. A sinking oil tanker, another Iranian attack on its Gulf neighbors, more U.S. bombings, or any other escalation could see sentiment quickly turn the other way.
And we have yet to feel the impact of this war’s inflationary effects. If the Federal Reserve starts seriously contemplating rate hikes to combat inflation, that would be a big blow to stocks.
When the action shifts, I expect we’ll see many of these eager investors rapidly head for the exits…
That’s why discipline matters more than ever in moments like this.
In fact, our internal ruleset should get even stricter than usual: Focus on the strongest setups – and consider scaling down the size and number of your trades. Careful stop losses and hedging can be smart plays as well.
This type of careful maneuvering is the key to making it as a trader long-term.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. If you’re feeling nervous about where the market is headed in 2026, you’re smart. It’s going to be tricky to thread the needle between investors’ complacency and economic trouble. But having an expert on your side can make all the difference.
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