We knew this was coming…
Ever since the war with Iran started, experts have warned us about this.
But they didn’t mention the trade setups.
War moves the market. It’s an ugly truth. But at this point, every American is feeling the effects of war in the marketplace.
And this time, it’s much more than just the cost of guns and ammunition…
Every day that the Straight of Hormuz remains closed, 14 million barrels (14% of global output) are lost from the market.
That means every remaining barrel of oil is more valuable.
You might have already noticed it at the pump… but where do we go from here?
- Will gas prices continue to rise?
- Is the top already in?
This week’s data gave us an answer…
Consumer Prices
The April Consumer Price Index (CPI), announced May 12, hit 3.8% annually, the hottest reading since May 2023.
That means the price for household goods is growing at a faster rate.
But that’s not the real headline…
The more important (and scarier) number is the Producer Price Index (PPI) for April, announced on May 13.
Wholesale inflation jumped to 6% annually in April, up from 4% in March. The monthly print of 1.4% was twice what economists expected, and the second-largest monthly gain since the index started in 2010.
Why is the PPI number scarier than CPI?
The PPI leads to the CPI. Producers often feel the pain first, especially when oil prices rise, because oil and gas are used in most kinds of production.
Then they pass the higher prices down the chain.
A 15.6% jump in wholesale gas prices accounted for 40% of the increase in April’s PPI numbers.
Oil is sitting above $100 a barrel, gasoline is averaging $4.50 at U.S. pumps, and the International Energy Agency just reported global inventories are falling at a record pace.
Here’s what that likely means: April’s 3.8% CPI is the floor, not the ceiling.
Nationwide’s senior economist Ben Ayers expects the May CPI to print above 4%. That would mark fresh multi-year highs and slam the door on any near-term interest rate cuts.
The Setup You’re Missing
Wall Street was pricing in a Fed that lowers interest rates this year to relieve lingering pressure on the market and boost business.
But wartime inflation says otherwise…
Rate-hike odds for year-end jumped to 30% after Tuesday’s CPI report, according to CME Group data.
Sticky inflation means the Fed is boxed into a corner. This is the same cocktail that crushed equities in 2022.
The S&P 500 (NYSE: SPY) is currently sitting just off all-time highs. Consumer sentiment is at an all-time low. And not to mention, earnings season is over. Tech revenue can’t come to the rescue like it did in April.
Everything points to a coming market pullback:
Trade With the Trend
Three out of four stocks follow the market.
When the broader market is healthy, individual names ride the wave higher. When the tape rolls over under macro pressure, most of those same names drift lower as well.
It doesn’t matter how clean the chart is or how strong the earnings report was last quarter. Gravity wins.
Right now, the market is staring down sticky inflation, a Fed that can’t cut rates, and a consumer running on fumes. That’s not a backdrop to bet that stocks will rip to new highs…
This is a put-buying environment.
I’m not shorting shares. Short-selling has no defined risk, and in a market that can melt up on a single peace-deal headline, that’s a fast way to blow up an account.
Put contracts solve that issue. Our max loss is the premium we pay, and our upside is open-ended if the trade works.
My Playbook
Use short-dated puts. A two-to-four-week expiration will give us good trading leverage with enough runway to wait for the move.
Start with a small size. This setup can take days to develop. And you don’t need a full position on day one.
Stay glued to the news. If the Iran situation reverses tomorrow and oil dumps back below $80, the inflation thesis could reverse. Get out.
Memorial Day is May 25. Gasoline demand traditionally spikes during that holiday weekend. As we approach the end of May, the oil crisis could grow to a hysteria…
I’m building a watchlist of overextended large-cap names that have ignored the macro warnings. The kind of stocks that have ripped on AI hype and Fed-cut hope, with charts stretched well above their 50-day moving averages.
Three out of four of those names will follow the market lower when the rate-cut narrative finally dies, and inflation takes center stage.
The PPI just told us what’s coming. The CPI will confirm it next month.
And put contracts on the right tickers could deliver some ridiculous gains.
Stay Street Smart,
Jeff Zananiri
*Past performance does not indicate future results, Not typical.
