Earnings Season Shows Robust Growth
The earnings season is showing signs of robust growth, with 78% of companies surpassing expectations, according to FactSet. Companies like Amazon and Alphabet performed well, although Disney faced challenges despite hitting analyst estimates. Lastly, the US Bureau of Labor Statistics has delayed the release of the latest jobs report due to the ongoing government shutdown, leaving federal operations and data updates in uncertainty.
Market Volatility And Strategy
Given yesterday’s surge in the ISM manufacturing index to 52.6, its first expansionary reading in 26 months, we should anticipate continued upward momentum in cyclical sectors. This kind of data jump has historically preceded market rallies, similar to what we saw in mid-2020 which kicked off a prolonged bull run. Therefore, buying call options on industrial and materials ETFs like XLI and XLB could capture this potential economic upswing.
However, the ongoing government shutdown and the suspension of the January jobs report create a significant information vacuum and a major source of risk. The last extended shutdown, which we saw back in late 2018, contributed to a nearly 20% market correction before a resolution was reached. To hedge against a similar outcome, we should purchase protective puts on broad market indices like the SPY.
The historic crash in precious metals last Friday likely sent implied volatility soaring, and this is an opportunity. As markets stabilize, we can expect volatility to decline, a phenomenon known as “volatility crush.” Selling option premium through strategies like iron condors or credit spreads on indices could be profitable in the coming weeks.
Within the tech sector, the market is clearly differentiating between companies, rewarding Oracle’s concrete cloud expansion while punishing Nvidia for its uncertain OpenAI deal. This suggests a pairs trading strategy could be effective, such as going long on Oracle call options while buying puts on Nvidia. This approach allows us to capitalize on company-specific news while remaining neutral on the broader tech sector’s direction.
