I woke up to reports of missiles trading fire between Iran and the United States near the Strait of Hormuz. That waterway is one of the world’s most important oil routes. Any disturbance there hits energy supply lines and rattles nerves. For weeks, market experts on the podcasts I track have sounded upbeat about growth, earnings, and the soft-landing story. But almost every one of them added the same warning: their optimism assumed a quick fix to tensions with Iran. After last night, that assumption looks weak.
I want to lay out why this matters, how it ties to current market momentum, and what I’m watching as a portfolio manager. This is not a call to panic. It is a reminder that the left tail—the low-probability, high-impact outcome—exists. Right now, investors are pricing a smooth path. I do not think that is the only path ahead.
“The Strait of Hormuz is the carotid artery for oil… peace talks came to a screeching halt… That is the left tail risk investors need to be aware of. Don’t chase right now.”
Why the Strait of Hormuz Matters
The Strait of Hormuz is a narrow channel between Oman and Iran. It links the Persian Gulf with the Gulf of Oman and the Arabian Sea. A large share of global crude and liquefied natural gas travels through it each day. When shipping slows, oil prices can jump fast. Insurance premia rise. Tankers reroute. Inventories tighten. Energy importers feel it at the pump, and energy-heavy industries feel it in costs.
Tensions there are not new. We have seen mine attacks, tanker seizures, and drone incidents over the past decade. Each time, markets weighed two things: the chance of a lasting supply shock and the chance of de-escalation. If the latest missile volleys stall any near-term talks, the risk of miscalculation rises. Even a short disruption can push spot prices higher and feed short-run inflation.
Energy costs matter because they seep into almost everything. Higher diesel affects shipping. Jet fuel affects travel. Petrochemicals feed into plastics and manufacturing. If oil spikes and stays high, central banks have a tougher job. They may keep rates higher for longer, which would pressure valuation multiples. That path is only one scenario, but it should not be ignored.
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What the Market Is Pricing Right Now
Momentum has been powerful. The S&P 500’s relative strength index (RSI) hit a three-year high. RSI is a simple indicator that tracks the speed and size of recent price moves. Readings above 70 point to overbought conditions. That does not mean a crash is coming. It does mean price gains have been fast and could pause or reverse.
When price momentum stretches and geopolitical risk rises, short-term setups get fragile. Liquidity can vanish for a day or two. Headlines do more damage. Investors who bought late often rush for the exits at the same time. That is how quick air pockets form.
“The momentum’s behind the market, and it’s pushed the relative strength index on the S&P 500 to a three-year high… Don’t chase right now.”
The Left Tail Risk: What It Looks Like
Left tail risk is the market’s blind spot. It is the thing most people are not positioned for because it feels unlikely or inconvenient to think about. In this case, the left tail is a drawn-out standoff that keeps the Strait of Hormuz on edge, pushes oil higher, and revives inflation worries. That path would test the soft-landing story that has driven equities this year.
Here is how it could play out if tensions linger:
- Oil volatility rises. Spot prices gap higher on headlines and drift lower on quiet days, but the floor stays firm.
- Inflation progress slows. Year-over-year numbers still improve, but month-over-month readings get sticky due to energy.
- Rate cuts get pushed out. Central banks choose patience, which weighs on rate-sensitive sectors.
- Earnings estimates face a double squeeze. Input costs rise while revenue growth slows, especially outside megacap tech.
This is not a forecast. It is a map of one path that the market has discounted. I think about these paths before they show up in prices, not after.
Why “Don’t Chase” Is My Base Case
Chasing is buying extended assets because they are rising, without an edge or a plan. It can work in strong bull runs, but the payoff shrinks as risk grows. Right now, momentum is hot, valuation spreads are wide, and headline risk is rising. Those three together argue for patience. If you missed a leg of the rally, your next entry should be on your terms, not on the crowd’s terms.
I am a long-term investor. I believe in staying invested, staying diversified, and matching risk to goals. But even long-term investors can adjust the pace of new buys. You do not need to sprint into strength, especially when a known shock sits on the front page.
Oil, Inflation, and Earnings: The Chain Reaction
Energy shocks work through the system in stages. First is the direct hit to gasoline and diesel. Next is the spillover into shipping and manufacturing. Then services feel it as travel and logistics reprice. If this shock is brief, the hit may be small. If it lingers, companies will pass costs through where they can.
Here is the data flow I watch:
- Brent and WTI front-month futures for directional and volatility signals.
- Crack spreads for refining margins.
- Freight and insurance rates near the Gulf and the Red Sea.
- High-frequency inflation trackers for energy and travel.
- Guidance from energy-heavy sectors during earnings calls.
Markets tend to overreact to the first shock and then underreact to the slow bleed. I prefer to avoid both mistakes. If oil spikes and then cools fast, that is a relief. If it stays firm and volatility remains high, I assume it will nudge core inflation measures and push rate cuts out on the calendar.
Momentum Is Real. So Is Gravity.
Momentum gets headlines because it is visible. New highs draw attention. But gravity matters too. As prices rise, expected forward returns tend to fall. That does not mean a drop is next. It does mean gains become harder to earn and easier to lose.
When RSI runs hot, and breadth narrows, I ask three questions:
- Are leadership names expanding, or is the rally top-heavy?
- Is volume rising with price, or fading?
- Are credit spreads confirming the move, or diverging?
Right now, the message is mixed. Big tech remains strong, quality balance sheets are favored, and cyclicals are sending a cautious signal. Credit is fine, but it does not say “no risk here.” That blend supports selectivity, not a buying spree.
Practical Steps for Investors
I manage risk with process, not with feelings. I also avoid all-or-nothing calls. Here are disciplined ways to navigate a stretched tape and rising geopolitical risk:
First, size positions with care. If you want exposure to a hot sector, start with a small size and set clear add points. Do not average up without a plan.
Second, prefer quality. Strong balance sheets, stable cash flows, and pricing power help when input costs rise. Firms that can pass along some costs have a buffer.
Third, mind your liquidity. In stress, liquidity dries up where you least expect it. Avoid crowded small caps or thinly traded names if you cannot hold through noise.
Fourth, use time, not just price. If a name is extended, give it time to digest gains. Base-building after a run can reset risk and create better entries.
Fifth, balance your exposures. Energy, defense, and selective commodities can hedge parts of this risk, but they come with their own swings. Keep them sized to your plan.
What Could Change My View
I am not fixed to one outlook. I adjust as facts change. Here are signs that would make me more comfortable adding risk on strength:
- Clear and verified de-escalation steps near the Strait of Hormuz.
- Oil volatility is falling alongside stable supply data.
- Inflation measures are holding their downtrend despite higher energy.
- RSI cooling while breadth improves, indicating rotation rather than froth.
On the other hand, the case for extra caution grows if we see a sustained jump in oil, softening earnings guidance tied to costs, and hotter monthly inflation prints. If those show up, I would expect the market to rethink the pace of rate cuts and reprice growth-sensitive assets.
What I’m Watching Next
Over the coming days, I will track:
Shipping lanes and any temporary closures or diversions. Even a short halt can ripple through supply chains.
Official statements from Washington and Tehran. Clear language about talks matters as much as military moves.
Energy markets at the open and close. Intraday reversals tell you who controls the tape—swing traders or long-only funds.
Equity market breadth and sector leaders. If leadership narrows further while headlines worsen, that signals fragility.
My counsel is simple: stay focused, stay calm, and do not let fear or greed set your entries. As I said to clients today, patience is a position.
Key Points to Remember
- The Strait of Hormuz is vital to global oil flows; the risk of fresh conflict raises energy and inflation concerns.
- Market momentum is extended, with the S&P 500’s RSI at a three-year high, a level that often precedes pauses or pullbacks.
- Left tail risk is not the base case, but it is real; do not build new positions on hope alone.
- Quality, sizing, and liquidity discipline matter more when headlines can swing prices.
- De-escalation, cooling oil volatility, and broader breadth would justify adding risk with greater confidence.
I listen to investing podcasts daily and respect the optimistic case. Growth is decent, balance sheets are healthier than in past cycles, and innovation is alive. But much of that bullish view rested on rapid progress with Iran. After last night, the timeline looks longer. I remain constructive on long-term investing and selective near-term. Do not chase.
Sincerely, from your sober and resting friend,
Frequently Asked Questions
Q: Why does the Strait of Hormuz affect markets so quickly?
It handles a large share of global oil shipments through a narrow channel. Any threat raises shipping costs and insurance, which lifts oil prices and can sway inflation.
Q: How should I think about RSI when making decisions?
RSI measures the speed of recent price moves. Readings above 70 often mean prices ran ahead of themselves. It’s a signal to slow entries, not an order to sell.
Q: What signs would point to a safer time to add risk?
Look for clear de-escalation near the Strait of Hormuz, calmer oil markets, steady inflation progress, and healthier market breadth. Those lower headline risk and reduce whipsaws.
