Focus Shifts to Stock Picking as Market Action Improves

Market traders

Investors breathed a collective sigh of relief on Tuesday as the market exploded higher on optimism about the situation in Iran. There is some question whether such a positive response was fully justified by the news flow, but with sentiment deep, dark, and negative, conditions were ripe for a relief rally.

It is also not a coincidence that the rally coincided with the end of a rough quarter. The Magnificent Seven ETF (MAGS) , which has been an institutional favorite, was one of the worst-performing groups during the quarter, but the big bounce reduced the ugliness in quarterly reports.

What Trump Said and What It Means

Markets around the world are enjoying more upside on Wednesday morning after President Trump told reporters in the Oval Office that the U.S. will be leaving Iran "very soon," estimating the exit at "two weeks, maybe two weeks, maybe three." He stated that Iran does not need to make a deal as a prerequisite for the U.S. to wind down, and claimed that oil prices would come tumbling down as soon as U.S. forces leave. The White House has announced that Trump will deliver an address to the nation at 9 p.m. ET Wednesday night, providing what press secretary Karoline Leavitt called "an important update on Iran."

One positive sign that real progress is being made is that oil is lower on Wednesday morning after holding up fairly well on Tuesday despite the hopes of progress. AAA confirmed Tuesday that U.S. average gas prices hit $4 per gallon nationwide for the first time since 2022, which gives Trump a strong political incentive to move quickly toward an exit. The UAE has also stated it is willing to join the effort to force the Strait of Hormuz open, which adds pressure on Iran.

New Risks to Watch

On the negative side, bonds and interest rates aren't moving much, suggesting there are still plenty of concerns about inflation. The economic news is going to take on greater importance now as investors try to gauge the extent of near-term damage. Retail sales and ISM manufacturing data are due and will draw a market response.

Two additional risks emerged overnight. Trump suggested in an interview with The Telegraph that the U.S. is considering leaving NATO, saying, "I was never swayed by NATO. I always knew they were a paper tiger." NATO members have been reluctant to commit military assets to reopen the Strait of Hormuz, which appears to be the source of Trump's frustration. A U.S. withdrawal from NATO would be a seismic development, and the market has not begun to react to that possibility.

The other wildcard is a direct threat to U.S. technology companies. Iran's Revolutionary Guards threatened to target 18 U.S. businesses, including Google (GOOGL) , Apple (AAPL) , Tesla (TSLA) , Intel (INTC) , and Boeing (BA) , starting Wednesday evening Tehran time. Trump dismissed the threat, saying Iran doesn't have much left to threaten with, but it is worth watching given the weight those names carry in the indexes.

Why the Buying Is Accelerating

There is still plenty of risk that the Iran situation could deteriorate, but the most important factor at this point is that Iran's offensive capabilities have been largely destroyed. They still have a few strategic levers left, including control of the Strait and their hidden uranium reserves, but that won't last long if the pressure continues.

The market is building on Tuesday's strong move, in part due to FOMO among those caught flat-footed by the sudden bounce following Monday's misery. The biggest moves always occur in the worst markets, primarily because positioning is poor and there is a sudden rush to add exposure. These moves can be much stronger than anticipated, but don't count on a straight-up V-shaped move. There are plenty of investors who will be happy to reduce positions that have caused so much pain recently.

Now Is the Time to Work the Shopping List

The most important issue, now that we have some better technical action, is stock picking. This is when that shopping list becomes critical.

When markets sell off the way they have recently, it is usually driven from the top down. The indexes and ETFs are sold, and all the stocks in those vehicles go with them regardless of individual merit. That creates major mispricing and opportunity. When conditions improve, investors focus on finding those values, and those are the stocks that provide the best trading opportunities. Big rallies are driven in part by the indexes, but it is the mispriced individual stocks that offer the biggest profits.

Start working that shopping list. That doesn't mean going all-in, but it does mean increasing your aggressiveness and starting to build some positions. There is still plenty of risk out there, so don’t hesitate to take some stops if the momentum turns and technical support does not hold.

At the time of publication, Rev Shark had no positions in any securities mentioned.