What the Headlines Are Missing About This Market Selloff VIEW IN BROWSER  | BY KEITH KAPLAN
CEO, TRADESMITH |
On Feb. 24, 2022, the largest European ground invasion since World War II began. After a well-flagged military buildup on Ukraine’s northern border, a column of Russian tanks 40 miles long began rolling toward Kyiv. Less than a week later, oil had crossed $100 a barrel for the first time in eight years. Within two weeks, it was touching $130. Gasoline hit $5 a gallon. And 2022 went on to become the worst year for stocks since the 2008 financial crisis. By the time the bear market had bottomed, the S&P 500 had fallen 25%. But the invasion didn’t start the 2022 bear market. The S&P 500 had already dropped more than 10% since Jan. 3 – before a single shot was fired. Instead, the war accelerated a fall in stocks that was already underway. Now, here we are. Once again, a war has broken out, and oil prices are spiking past the $100 mark. And once again, the more important story for us as investors isn’t in the headlines – it’s what’s been going on in the market itself. Unlike how most people see it, bear markets rarely announce themselves in the headlines. They build underneath the surface – showing up as warnings in the data – while most investors are watching something else entirely. So today, let’s look at what the warnings TradeSmith’s systems are flagging about the market’s health in 2026. Then I’ll walk you through the steps you can take to protect yourself in what I’ve been warning could become the “Year of the Bear.” These Red Zone Entries Are an Ominous Sign So far this year, the tech-filled Nasdaq 100 and the broader S&P 500 are down about 2%. But despite what you’re reading in the mainstream press, the war didn’t start the decline – it arrived in the middle of one. The Nasdaq 100 peaked last October – four months before the bombs in Iran started to fly. And it had already been grinding lower through a tech-led selloff driven by AI valuation fears and software sector weakness. The S&P 500 peaked on Jan. 27, a month before the strikes. Before the strikes on Iran, three key market sectors entered Short-Term Health Red Zones – Financials, Technology, and Consumer Cyclicals. And yesterday, Financials entered a Long-Term Health Red Zone. This tells us the trend has broken down not just over weeks but also over a longer stretch of time. 
Short-Term Health tracks the kind of momentum shifts that can last a few weeks to a few months. When a sector’s Long-Term Health turns red, it’s telling us that the long-term trend has broken down, not just the near-term momentum. Right now, we’re seeing that exit signal fire for the Financial Select Sector SPDR ETF (XLF). It covers stocks in banks, insurers, brokerage firms, and credit card companies – all drawn from the S&P 500. And that’s a worry for more than just the financial sector. Why These Bearish Shifts Are Happening The bearish momentum shift in Financials is partly due to the AI disruption story. Banks and payment companies sit in the middle of financial transactions – moving money, extending credit, and collecting fees. Investors are now asking what happens to that business model when AI agents start handling those transactions automatically. The sector’s recent Long-Term Red Zone entry also spells trouble for the market more generally. Financials aren’t just another sector. They’re the circulatory system of the entire economy – providing the loans, credit, and capital that keep businesses running and consumers spending. When they get sick, the rest of the market tends to follow. Take the 2008 financial crisis, which plunged the economy into the worst recession since the 1930s and cut the stock market in half. In June 2007, Bear Stearns moved to bail out two of its own hedge funds – both stuffed with subprime mortgage bets that had gone bad. The S&P 500 kept climbing for another three months before peaking that October. I’m not saying a weakening Financials sector guarantees a bear market. But it raises the odds of one. And combined with the Short-Term Health Red Zone entries for the Technology sector and Consumer Cyclicals, market health doesn’t look great right now. Technology was the leader of the bull market. And it’s never good news when a sector that led a bull market higher starts to lead the way down. Consumer Cyclicals are businesses people spend money on when they feel confident – retailers, restaurants, automakers, homebuilders. When that sector starts flashing warning signs, it tells us consumers are tightening up. And consumer spending is about 70% of the U.S. economy. This is not a reason to panic. The bull market may resume its march higher on the other side of this war. But with so many key market sectors flashing warning signs, now is a great time to shore up your risk management plan. Your Risk Management Checklist If you’re a longtime Daily reader, you’ll have to forgive me for sounding like a broken record. But I’d be doing newer readers a disservice if I didn’t repeat my advice from the end of last year when I first started warning about cracks starting to form in the bull market. Step 1: Audit Your Long-Term Holdings If you own an investment for the long haul – stocks, index funds, or even crypto – stop and ask: Why am I still here? Write it down. What made you buy it? Is that reason still valid? Is the business still growing? Or has the story shifted into hype mode? Most investors skip this step entirely. But markets reward the clear-eyed and punish the complacent. And with so many key sectors flashing warnings, now is no time to be complacent. Step 2: Decide When You’ll Sell Before You Have To Every successful investor I know has one thing in common. They decide – in advance – what would make them walk away from a position. Maybe it’s a business reason: earnings slowing, debt piling up, the growth story falling apart. Maybe it’s valuations getting too high. Maybe it’s a meaningful break below a key price level. Or maybe it’s the kind of momentum shifts our systems are picking up right now. The trigger doesn’t matter as much as setting it before emotion enters the room. Step 3: Have an Exit Strategy – and Stick to It Not sure where to start? Here are three approaches that work: - The 25% Rule: Set a trailing stop 25% below your buy price. If the stock falls that far from its peak, you sell – automatically, no second-guessing. It takes emotion out of the equation.
- The 2x Rule: When a stock doubles, sell half. You’ve recovered your original stake. Now, you’re playing with “house money.”
- TradeSmith’s VQ Stop Loss: Every stock has what we call a Volatility Quotient – its own rhythm of movement. Some stocks swing 10% in a week without breaking a sweat. Others barely budge. Our system flags when a move breaks from that normal rhythm – which is usually when the real trouble starts.
Whatever method you choose – pick one. Make it a rule you follow, regardless of how the headlines read or how you feel on a given morning. I’ve also been tracking a broader set of warning signs in the market based on our Short-Term Health indicator. And I put together a presentation laying out what the data says 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. Short-Term Health can also help you make smarter moves ahead of emerging bullish trends. For instance, it turned bullish on oil stocks in November, months before the Iran war. Since then, the sector is up more than 25%. To see the proof for yourself, follow this link. All the best, 
Keith Kaplan
CEO, TradeSmith | 
