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These Signals Called Gold, Energy, and Software Perfectly
These Signals Called Gold, Energy, and Software Perfectly
BY MICHAEL SALVATORE, EDITOR, TRADESMITH DAILY
In This Digest:
- A warning from the junk bond market
- The top-performing sectors over the last month reveal a common theme
- Gold and silver have completely lost their luster – and we warned you ahead of time
Iran rejected yet another ceasefire, and markets shrugged…
Monday marked Iran’s second formal rejection of a ceasefire proposal.
The deal – brokered by mediators from Pakistan, Egypt, and Turkey – exchanged a broad opening of the Strait of Hormuz for a 45-day pause in fighting.
Wall Street sent stocks higher anyway, pushing the tech-jammed Nasdaq 100 up 0.6% and the S&P 500 up 0.4% – the highest levels in the past three weeks. They’re now up 6% and 4% off their lows, respectively.
Now, we’re waiting to see if President Trump’s biggest threat yet carries weight. He said earlier this week he would bomb Iran “back to the Stone Ages” if the ruling regime doesn’t reopen the Strait of Hormuz by 8 p.m Eastern today. And today, he took it to another level, promising “a whole civilization will die tonight”… along with bombing Kharg Island, Iran’s main oil shipment hub.
We can spend all day glued to the headlines, speculating whether stocks have hit bottom or there’s another flush to come.
But here at TradeSmith, we prefer to rely on cold, hard market data to guide our decisions, rather than guesswork. And the data says definitively that we should stay cautious.
The S&P 500, the Nasdaq 100, and the Dow are in Short-Term Health Red Zones. The Russell 2000 and S&P 600 small-cap indexes are as well. Only the mid-cap S&P 400 remains in a Yellow Zone, meaning it’s a short-term hold, not a sell.
Short-Term Health is our volatility-based indicator designed to spot momentum shifts that can last months at a time. And we designed it to be sensitive to even the slightest bearish tremor.
As long as a stock or index is in a Red Zone, the short-term trend is down.
That doesn’t mean there won’t be bounces.
Just look at the 2022 bear market. It saw plenty of bounces of 3% or more – even one in July that saw the S&P 500 rally 15% – on its way to a roughly 18% loss for the year. And at one point, the index was down as much as 27% from its highs.
Until our indicators say otherwise, we should treat these rallies as opportunities to take profits (or smaller losses) off the table.
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Iran. Oil at $115. Defense stocks surging overnight.
Luke Lango’s readers weren’t surprised. He’d already identified the exact supply chain chokepoints that become national security emergencies the moment a conflict like this erupts. He’s named 100+ stocks he believes will be at the center of Washington’s next move. Free. Get the full list here.
Another troubling sign is rising junk bond yields…
During 2020 and 2021, when the Fed held rates near zero in the wake of the pandemic, companies borrowed aggressively by issuing bonds.
They locked in rates of 3% to 4%, and it looked smart at the time.
But according to S&P Global, more than $1 trillion in speculative-grade corporate bonds (aka “junk bonds”) mature in 2028 alone – the largest maturity wall in history.
When those companies go back to the market to refinance, they won’t find 3% rates waiting for them.
High-yield bonds are trading at 7% to 8% today. A company that borrowed $100 million at 3% was paying $3 million a year in interest. Refinancing at 7% costs $7 million – more than double.
That extra $4 million has to come from somewhere – like layoffs… dividend cuts… asset sales… or defaults.
And rates aren’t coming down to bail them out. CME FedWatch data shows traders now see an 8.8% probability of a Fed rate hike by December – a number that was near zero just weeks ago.
The Fed doesn’t set the rates of corporate bonds. But it does set the tone of interest rates across the board. And this is the kind of pressure that corporate borrowers do not want to see.
But you don’t have to sit idly by ahead of a potentially even steeper downturn.
Our newest indicator is designed to get you out of stocks before a true bear market hits. And it has an 11 out of 11 success rate on warnings across 40 years.
And while warning No. 12 hasn’t triggered in earnest yet, we’re starting to see rumblings that should concern any investor at or near retirement.
Our new indicator has already flashed a warning on the 30-strong blue-chip Dow index after it – and a significant portion of its holdings – entered our volatility-based sell zone.
Our CEO, Keith Kaplan, went in depth on how you can use this new indicator to protect your downside in a new presentation all about Warning 12.
You can check it out here. It will make a significant difference in how you trade in 2026.
Of the top five ETF winners over the last month, three are energy plays…
Despite the market dropping at the start of the war, plenty of sectors are working – and working well.
Just look at the top five best-performing ETFs over the past month along with their Short- and Long-Term Health statuses:
Three of the five are direct energy plays – exactly what our Short-Term Health indicator has been flagging as a buy since well before the Iran conflict began. GSG, the commodity ETF, is being driven almost entirely by crude oil’s surge. XES and XLE are packed full of U.S. energy producers.
If you’ve been following our coverage of energy stocks since the start of the year, these gains should look familiar – we’ve been highlighting the sector’s Green Zone signals for weeks.
EWZ is interesting given where it sits in our coverage. We highlighted Brazil’s Short-Term Health buy signal in our Feb. 18 issue as part of the broader ex-U.S. trade.
Brazil is a commodities powerhouse. The country is on track to be a top five global oil producer. So it’s no huge surprise that it’s proven to be one of the few country ETFs worth holding right now.
And LIT – the lithium and battery technology ETF – tracks companies across the battery supply chain: lithium miners, battery cell manufacturers, and EV component makers.
In a market where energy supply has been disrupted, battery storage and electrification become more attractive as alternatives. It’s a different kind of energy trade, but the same underlying driver.
Now for the other side of the ledger…
Below are some of the worst performers over the same stretch of time.
Gold and silver both triggered Long-Term Health sell signals at the end of January, which we covered in our Feb. 2 issue.
At the time, both metals had just come off powerful rallies. And our Long-Term Health indicator – which measures whether a trend has broken down not just over weeks but over a longer stretch – flashed Red. Both have continued lower since.
IGV – the software sector ETF – is a story we’ve been telling since February. AI disruption fears gutted the sector early in the year, with software-as-a-service (SaaS) stocks Adobe (ADBE), Atlassian (TEAM), and Intuit (INTU) falling 25% to 56% from January highs.
Our Short-Term and Long-Term Health indicators had already flagged the sector’s breakdown months before those moves accelerated. Take a look at this chart of IGV from the start of the year. Its Short-Term Health Red Zone triggered on Nov. 24, ahead of a 20% downturn:
The message from this data is clear. In this environment, only energy is working. Even traditional safe havens like gold have failed to hold the line.
Holding any stock or ETF that’s flashing Red on Short-Term Health right now means fighting a confirmed downtrend.
To building wealth beyond measure,
Michael Salvatore
Editor, TradeSmith Daily
