The Dow Just Flashed a Bear Market Warning VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - The longer the Strait of Hormuz stays closed, the harder it is for your portfolio to stay whole
- The Dow has flashed a bear market signal for the first time since before Liberation Day
- Why profitable small caps are your best bet as rate-cut hopes evaporate
The Iran War has entered its fifth week… And despite the endless headlines and hints from the White House promising a swift end, there’s still no sign of a ceasefire. Iran continues to threaten shipping through the Strait of Hormuz, where in normal times, roughly one-fifth of the world’s oil passes through. The U.S. and Israel continue their air strikes on Iran. And 3,500 U.S. Marines have deployed to the Persian Gulf. Our beat here at TradeSmith isn’t geopolitics or international diplomacy. Instead, we watch what the market is doing, through the lens of data, and invest accordingly. And right now, the signals we’re seeing through that lens are leaning bearish. | Recommended Link | | | | Nvidia’s own customers could soon become fierce competitors, dethroning the AI Chip King. But there’s a critical component that AI data centers need just as badly as chips. The demand is so massive that a single data center uses enough of it to stretch around the earth eight times. While the media hypes up AI chips, the smart money has found the next big thing. Discover Futurist Eric Fry’s “Nvidia-killer” stock ideas. Click here for complete analysis. |  | | The Dow just triggered a bear market warning… Last Monday, with the Dow down 10% from its highs, it entered a Long-Term Health Red Zone. 
It also triggered TradeSmith’s proprietary Bear Market signal. This doesn’t just track whether the Dow is in a downtrend. It factors in the health of the Dow’s underlying components, using Long-Term Health readings across the 30 stocks that make up the index. When the conditions across the index and its individual components line up, the signal fires. The last time it fired was right before the Liberation Day crash. And before that, it fired during the 2022 bear market – a fall that eventually wiped out about a quarter of the S&P 500’s value. To be clear: A signal is not a guarantee. And the Dow is just one of the major U.S. market indexes. The S&P 500 and the tech-filled Nasdaq 100 have not yet triggered the same signal. Still, the Dow is focused on 30 of the biggest blue-chip household names around. When it tips into Long-Term Health Red territory and triggers a Bear Market warning, we should pay close attention. We’ll be watching the other major indexes closely. If the S&P 500 and Nasdaq 100 follow the Dow into a Long-Term Red Zone, that will bolster the case that there’s more pain ahead. For now, the data is telling you to pay close attention to your downside risk. For subscribers, that means reviewing the Long-Term Health of the stocks you own. Anything in a Red Zone is an exit signal. Anything in a Yellow Zone deserves a closer look. And if you’re not already a subscriber, stay tuned here in TradeSmith Daily. Each day, we report the most pressing data we see on our platform to help you navigate bull and bear markets alike. There’s now a higher chance for rate hikes than cuts… For much of 2025 and early 2026, the assumption was that the Fed would be cutting interest rates this year. That assumption is now gone. On Sunday the CME FedWatch Tool – a gauge of where traders expect interest rates to go next – was pricing in a 22.5% chance of a rate hike by year-end… and just a 1.3% chance of a cut. A month ago, this tool forecast three cuts in 2026. What changed? The war in Iran. Oil above $100 feeds directly into inflation – through energy costs, shipping, manufacturing, and food. And Fed Chair-designate Kevin Warsh is walking into a potential stagflation trap. That’s when prices rise and growth slows at the same time – the worst of both worlds for monetary policy. Cutting rates in that environment risks adding fuel to a fire that’s already burning. Rates holding still – or moving higher – is now the base case. And that changes the math for one of this year’s best-performing groups. Small caps have outperformed large caps in 2026. The S&P 500 is down more than 6% on the year. The small-cap S&P 600 (the index of 600 U.S. companies whose market caps fall between $1.2 billion and $8 billion) has held up better – up as much as 8% in February before pulling back to roughly flat. 
But that outperformance was in part built on the expectation of lower rates. Smaller companies are more sensitive to the cost of borrowing than large caps. When rates fall, they benefit disproportionately. When rates stay high – or rise – they feel the pain first. The most exposed group are small-cap companies that aren’t yet profitable. These businesses burn cash, rely on cheap debt to stay alive, and have no cushion when rates go against them. TradeSmith’s Short-Term Health indicator is already picking this up. Unprofitable small caps are entering Red Zones at an accelerating pace. Short-Term Health is like our Long-Term Health indicator we discussed earlier but is tuned to spot faster trend shifts. Take a look at the most recent Short-Term Health Red Zone signals in the small-cap S&P 600 index in companies with negative earnings: 
We’re seeing the pain across industries – mortgage REITs, auto parts, restaurants, steel, apparel. But the signals in REITs are especially notable. Real Estate Investment Trusts (REITs) are companies that own income-producing real estate. They tend to have high yields because they pay out nearly all their earnings to investors to avoid corporate taxes. That makes them a common target for yield-hungry investors when the Fed’s interest rate falls. And not only is the Fed potentially set to hike rates… making REITs less attractive… but also yields across the board are headed higher. The 10-year Treasury yield – the best analog to the U.S. mortgage market – is up around 4.4% from 3.9% just a month ago. That’s set to weigh on mortgage costs, making real estate even less attractive. Regardless, this is more than just a sector story. When rates rise, the market doesn’t discriminate based on what a company makes. It discriminates based on how strong its balance sheet is. That might be why profitable small caps are holding up. Short-Term Health is showing far fewer new Green Zone signals in S&P 600 stocks with positive earnings, but still plenty in the last month as rates assumptions changed: 
These are profitable companies with real cash flows and manageable debt that can weather higher rates. If you own small caps, check their Health status this week. Unprofitable companies in a Red Zone are giving you a clear exit signal. Profitable ones in a Green Zone are where the opportunity is. The energy trade Keith has been pounding the table on… While the broader market has struggled in 2026, one part of the outlook of our CEO, Keith Kaplan, has played out almost exactly as he described. Earlier this week, he posted on X that energy and materials companies he’s been tracking are continuing to lead. Occidental Petroleum (OXY) and Enterprise Products Partners (EPD) both hit all-time highs. Range Resources (RRC) reached a new one-year high. Dow Chemical (DOW) and LyondellBasell (LYB) hit one-year highs. As Keith put it, when you see that kind of coordinated strength across energy producers, pipelines, and materials, the market is signaling a lasting trend. This isn’t just a reaction to the Iran war. Our Short-Term Health indicator flashed a buy signal on OXY all the way back on Jan. 29 – a full month before the U.S. and Israel began their campaign against Iran. At the time, OXY was trading at $45.21. It’s now at $65.57. That’s a 45% gain in two months. 
The signal was there before the catalyst. That’s what the data-first approach gives you. Keith posts insights like this regularly on X – real-time, unfiltered, ahead of the news cycle. Follow him at @KeithTradeSmith to see what he’s watching before it shows up anywhere else. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily Disclosure: Michael Salvatore held shares of LyondellBasell (LYB) at the time of this writing. | 
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