How to Play This High-Oil, High-Inflation Market

BY KEITH KAPLAN
CEO, TRADESMITH

Todd Littleton’s family has been farming in Gibson County, Tennessee, for three generations.

These days, he grows corn, soybeans, and wheat.

And according to an Associated Press report, he’s paying $100,000 more for fertilizer than he did last year – a 40% jump.

The reason is a narrow waterway off the southern coast of Iran that’s been all over the news – the Strait of Hormuz.

You’ve probably heard that the Strait normally carries roughly a fifth of the world’s oil and a fifth of its liquefied natural gas. But about one-third of global seaborne trade in fertilizers also normally passes through it.

Then there’s polyethylene – the clear, flexible plastic in the bag your groceries came home in, the lining inside your milk carton, and the tubing in an IV drip. Eighty-five percent of Middle East polyethylene exports move through the same channel.

So does about a third of the world’s helium. It’s the gas semiconductor factories use to make the chips inside every phone, laptop, and AI server on the planet.

None of those critical commodities are moving right now. Any ship that passes through the Strait risks becoming a target of missile and drone attacks by Iran’s Islamic Revolutionary Guard Corps.

As I detailed on my quarterly call with TradeSmith’s top-tier Platinum members earlier this week, it’s one of four major challenges facing the bull market on Wall Street.

Taken together, they explain why the market has been swinging hundreds of points on single headlines… and why it’s gotten a lot of investors feeling twitchy.

Which brings me to the question I kept hearing on the call: “Should I sell?”

Most folks will answer that question the wrong way. They let the headlines decide for them and panic sell. Or they freeze and watch a manageable loss become a serious one.

Neither is a plan. Today, I’ll give you one. Including the sectors to look at that actually thrive in this kind of market.

First, let’s take a look at the other factors pressuring this bull market.

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Three Other Major Challenges to the Bull Market

The Strait of Hormuz is the most visible pressure point for this market. But it isn’t the only one. On my call with Platinum members, I walked through three others.

1. The Fed Is Trapped

When oil prices spike, inflation follows. Every 10% rise in oil adds about 0.4 percentage points to global inflation, according to the International Monetary Fund.

WTI crude – the U.S. benchmark – has shot up roughly 40% since the strikes on Iran began on Feb. 28. That means this oil spike alone is pushing up inflation by more than 1.5 percentage points.

That puts the Fed in a tough spot. Cut rates to support a slowing economy, and you risk an even bigger inflation spike. Hold rates – or raise them – and you risk choking off growth, right when the stock market is spluttering.

2. The Consumer Gets Squeezed

Consumer spending is roughly 70% of the U.S. economy. When gas prices rise, there’s less in the wallet for everything else.

That money doesn’t get spent at restaurants, clothing stores, or car dealerships. It goes into the gas tank instead.

Higher fuel costs also push up utility bills and airfares. Groceries cost more. Consumers – already carrying record credit card debt – have less room to maneuver.

And when spending slows, corporate revenues slow. When revenues slow, earnings disappoint. And when earnings disappoint, investors reprice stocks.

3. The AI Paradox

This one is more nuanced. It’s also even more important for understanding where we are in this cycle.

AI is transforming how businesses operate. That’s real. But the market has been pricing in the upside without fully reckoning with the downside.

Take the mass layoffs at payments company Block (XYZ). It’s the firm behind Square and Cash App that Twitter cofounder Jack Dorsey now runs.

Last month, he announced he was cutting 4,000 staff – 40% of his workforce. In his letter to shareholders, he didn’t mince his words. “Intelligence tools,” he wrote, “have changed what it means to build and run a company.”

The press ran this as an AI disruption story. And it is. But it also has knock-on effects for the economy.

Those laid-off workers are also consumers. They have mortgages…. car payments…. grocery bills. They also eat in restaurants… go to the mall… and go on vacations. When they lose their jobs, they pull back on spending.

Multiply that across the economy and the consumer engine powering economic growth will stall.

That’s the AI paradox. The same efficiency gains that send individual stocks soaring are eroding the consumer base that the economy runs on.

It’s a troubling picture. And I get why folks are worried. But there’s a way to handle this without letting your emotions get the better of you.

Panic Is Not a Strategy

When headlines are this loud, the instinct is to sell your stocks and move to cash. I’ve been investing long enough to know that instinct is usually wrong.

My approach: Don’t sell based on headlines or on emotions. Instead, be systematic, and let the data decide.

That’s the whole point of the tools we’ve built at TradeSmith. They exist to keep your emotions from running the show.

Here’s the framework I use.

Step 1: Check Long-Term Health.

This is your first and most important question for your long-term holdings. Is a stock you own still in a Green Zone?

Long-Term Health measures whether a stock is moving within its normal range of behavior – its individual volatility "fingerprint.” As long as it’s in the Green Zone, the long-term trend is intact. Temporary drawdowns, however gut-wrenching, are not a reason to sell.

If a stock you own has entered a Red Zone, that’s a different story. The trend has broken down. That’s when you sell – not because the headlines scared you, but because the data confirms the move is real.

Right now, none of the major U.S. indexes are in Long-Term Health Red Zones. But the Dow has entered a Yellow Zone.

That’s a sign that a momentum shift is underway in the 30 industrial stocks that make up the Dow. But a bearish trend hasn’t been confirmed.

Think of it like the warning light on your car’s dashboard. The engine isn’t broken yet. But something’s changed, and it’s worth paying attention.

Step 2: Check your VQ Stop Loss.

If you’re already a TradeSmith subscriber, every position in your portfolio should have a stop loss set at its Volatility Quotient (VQ) – the level at which a pullback stops being normal and starts being a warning sign.

If your stop hasn’t been hit, you have no reason to sell. The VQ is designed to keep you in winning positions through the inevitable turbulence while protecting you from the losses that can permanently impair a portfolio.

If your stop has been hit, sell – and don’t second-guess it.

Step 3: Check Short-Term Health for what to do next.

Once you’ve assessed what you own, the next question is where to look for opportunity.

Short-Term Health helps you spot stocks and sectors where short-term momentum is breaking down. It also shows you the stocks and sectors where it’s turning positive – the early movers in a new cycle.

Right now, that’s key. This environment is genuinely challenging for many parts of the market. But it’s a powerful tailwind for others.

Where to Buy Now

Not all stocks suffer in a high-oil, high-inflation environment. Some thrive. Here’s where TradeSmith’s signals are pointing.

The sectors with the wind at their backs:

Energy producers – ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP). When oil prices rise, their revenues rise with them. These are direct beneficiaries.
Oilfield services – Halliburton (HAL) and Schlumberger (SLB). Higher prices mean more drilling. More drilling means more demand for the equipment and expertise these companies provide.
Defense – Defense spending is already elevated, and it tends to stay that way. Defense contractors are a natural port in this particular storm.
Domestic LNG exporters – The U.S. is the world’s largest liquefied natural gas exporter. With global gas prices spiking, U.S. exporters are selling into a very hungry market.
Uranium and nuclear – When oil and gas supplies are disrupted and prices spike, energy alternatives get repriced. Nuclear is no exception.

The key point: You don’t need to make big macro bets to navigate this environment. You just need to know which parts of your portfolio are exposed – and which aren’t.

That’s what our tools are designed to tell you.

All the best,

Keith Kaplan signature

Keith Kaplan
CEO, TradeSmith

P.S. I’ve been tracking a broader set of warning signs in the market, based on our Short-Term Health indicator. And I’ve put together a presentation that every investor should see laying out what comes next – and how to position yourself ahead of the market’s next big moves.

It isn’t all about protecting your downside risk – although that’s key. As I showed you today, Short-Term Health can also help you make smarter moves ahead of emerging bullish trends.

How to Play This High-Oil, High-Inflation Market