A Trading Plan for Tariff Drama VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Buy smaller stocks as tariff turmoil continues
- AI disrupts another software sector – should you buy the dip?
- Energy is outperforming in 2026
The Supreme Court says Trump's tariffs are illegal… In a 6-3 ruling, the justices ruled against President Trump’s authority to issue tariffs through the International Emergency Economic Powers Act. With the stroke of a pen, most of the White House’s current tariff policy became illegal. And as much as $170 billion in collected tariff revenue is now potentially available for refunds to importers who paid them over the last 10 months. Trump is now seeking to use Section 122 of the Trade Act of 1974. It grants the president unilateral authority to impose tariffs for up to 150 days. And he’s announced a new global 15% tariff under the Trade Act to take effect today. The tariff story is, as ever, uncertain and in flux. So, trading based on tariff headlines is like throwing dice into a flattened cardboard box in a back alley. That’s why, here at TradeSmith, we focus on market data to inform our decisions, not the news headlines. And right now, we see a clear trading plan that doesn’t hinge on the ongoing tariff drama. Recommended Link | | Last summer, Luke Lango told his followers to buy MP Materials before the White House did, giving them the chance to make 100%+. And, on December 5th, he also predicted the White House would invest in USA Rare Earth (USAR)… On January 24th, the Government sent shares soaring after announcing a $1.6 billion stake. Click here to see the next stocks Luke believes the government will target. |  | |
That plan involves small- and mid-cap stocks… The Magnificent 7 mega-cap tech stocks – which have grown their weighting in the S&P 500 from 20% in 2022 to more than 30% today – are largely responsible for the index’s 80% climb since the start of 2023. But so far in 2026, they’ve lagged. Every one – Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), Alphabet (GOOGL), Apple (AAPL), Tesla (TSLA), and Nvidia (NVDA) – is down or little better than flat this year. Meanwhile, smaller stocks have been rallying. The small-cap S&P 600 and the mid-cap S&P 400 are up more than 7% in 2026: 
While large caps struggle, smaller companies are breaking out. Both benchmarks broke out to one-year highs at the start of 2026. And that’s no surprise. As we noted in January, as long as tariffs remain a feature of U.S. trade policy, smaller companies have a structural advantage. Unlike the multinational giants that dominate the S&P 500, small-cap companies do the overwhelming majority of their business right here at home. They don’t depend as much on global supply chains that get tangled up in trade disputes, and they aren't as vulnerable to retaliatory tariffs from trading partners hitting their exports. In fact, if tariffs succeed in their stated goal of pushing more manufacturing and consumption back to American soil, these smaller firms stand to be among the biggest winners — they're already embedded in the domestic economy that policy is trying to protect. If you’re worried about trade-war turbulence rattling large-cap multinationals, smaller companies offer a relatively sheltered alternative without having to sit on the sidelines entirely. The next question: Which small caps should you buy? For answers, let’s turn to Jason Bodner’s Quantum Score – the best way to find great small-cap stocks at TradeSmith. Dedicated readers know that Jason spent nearly two decades working on Wall Street before joining TradeSmith. He was a partner and head of equity derivatives at Cantor Fitzgerald. And his job was executing trades for the firm's institutional clients – often valued at hundreds of millions, if not billions, of dollars. This experience showed him firsthand how these Big Money investors move markets. He started to notice that the stocks they bought would move higher as the money flooded in. After his time on Wall Street, Jason quantified this impact of Big Money with his Quantum Score. He rates stocks based on fundamental factors – like earnings, revenue, and profit margin growth. Then he rates them on their technical strength and unusually large buying volumes. Combined, they form the Quantum Score – a simple 0-100 rating where the higher the score, the better the stock. Below is a list of stocks in the S&P 400 and S&P 600 with Quantum Scores above 80 – the top tier of these markets. And it’s sorted by our Short-Term Health signal, giving us the most recent buy signals. 
In order of most recent Short-Term Health buy signal, those stocks are Tenet Healthcare (THC), Tootsie Roll Industries (TR), Omega Healthcare Investors (OHI), Antero Resources (AR), and American Healthcare REIT (AHR). Short-Term Health is one of TradeSmith's core technical indicators. Think of it as a traffic light for any stock you're watching. It measures a stock's recent price action against its own typical behavior — how far and how fast it tends to move — to give you a daily read on whether momentum is building or breaking down. Green means the stock is in a healthy uptrend and worth considering as a buy. Red means it has broken down, and you should seriously consider selling. Yellow is the caution zone — the stock has pulled back from its highs but hasn't yet crossed into outright unhealthy territory, so you watch and wait. By combining the Quantum Score and our Short-Term Health signal, this screen helps us isolate some of the best small-cap buys in the market today. But promising as that is, it has nothing on what Jason’s been working on behind the scenes. This week, Jason will pull back the curtain on a joint research project with Brownstone Research founder, technologist, and angel investor Jeff Brown. With Jason’s quantitative might and Jeff’s Silicon Valley connections, they’ve applied Jason’s system to find a group of stocks that are quietly some of the most important AI companies in the world. Many investors would never guess that these companies are AI heavyweights. But Jason’s system can pick them out from the pack purely by watching the huge amounts of institutional money flowing into them. He and Jeff are going live on Wednesday, Feb. 25 at 8 p.m. ET to show which under-the-radar AI plays the big money is flowing into. Discover the hidden plays that could become the next group of trillion-dollar super stocks by joining them. To reserve your spot, click here now. This slice of the software sector got smacked on Friday… Another week, another new AI tool threatening to disrupt another sector of the software market. So far, we’ve covered the decline of software stocks, financial research firms, and even legal services companies here in the Daily. Now, AI is threatening a new frontier: cybersecurity. On Friday, private AI company Anthropic released its newest tool: Claude Code Security. It promises to let users develop in-house cybersecurity solutions rather than having to pay for services from a big cybersecurity firm. Cybersecurity stocks Palo Alto Networks (PANW), CrowdStrike (CRWD), Fortinet (FTNT), and Cloudflare (NET) fell on Friday… with standout drops of 8% in CRWD and NET. Are these dips worth buying? Broadly… no. There’s only one cybersecurity stock our systems say is worth buying right now: 
Of the eight major cybersecurity companies, only Akamai Technologies (AKAM) is flashing a buy on its Quantum Score and Short-Term Health. Every other stock has middling to poor scores. And our Short-Term Health tool shows these stocks have been in decline for months – well ahead of the headlines around Claude’s new cybersecurity tool. Finally, don't take your eyes off energy stocks… While large-cap stocks have been flat all year long, the Energy Select Sector SPDR Fund (XLE) has climbed more than 21%. 
This is happening as the U.S. amasses military forces in the Middle East, with Iran's nuclear program squarely in its sights. And it comes in the aftermath of the U.S. special forces operation to arrest Venezuelan president Nicolás Maduro and seize control of the country's vast oil reserves. But the elephant in the room is the rapidly growing energy needs for AI data centers. Modern AI data centers require tens of thousands of high-performance chips running continuously. They often consume five to 10 times more power per rack than older enterprise workloads like email servers or databases. As a result, what used to be a steady rise in energy demand has turned into a near-vertical spike. A single large AI data center can draw 100 to 300 megawatts of power – roughly the same amount a city of 80,000 to 250,000 people uses. That means power demand is rising exponentially. Energy companies serve that demand – and investors are flocking to them in droves. So, let’s find the best-of-the-best trades in the energy sector. First off, take a look at our Market Sector Health view: 
Notice that Energy is second only to the Materials sector when it comes to the number of stocks in Long- and Short-Term Health Green Zones. Materials, Energy, and Consumer Defensive stocks are in the healthiest uptrends right now. And Technology, Communications, and Financial stocks are the least healthy. Now, let’s dive into the Energy sector for some strong trades. Here’s a list of energy stocks that are: - Up more than 20% over the last year
- Have recently fired Short-Term Health buy signals by entering the Green Zone
Those are just 33 stocks out of hundreds of energy companies we track. The top five are listed here: 
Of this group, Marathon Petroleum (MPC) catches our eye for having just emerged from a Short-Term Health Red Zone, as its price shot up to a two-year high during a six-month uptrend: 
Note above how the first Green signals on MPC coincided with a major shift in trend around May of last year. That’s taken the price from just above $150 to over $200 in just six months. If you’re looking for trending energy stocks, this is a great method to find them. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily | 
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