The NASDAQ index closed the day higher, achieving a marginal rise of 0.05%, enough to set a record. It has reached record levels each day this week and has done so 11 times this year. The NASDAQ rose by 11.39 points, reaching 20,895.66.
The S&P experienced a minor decline of -0.01%, having closed at a new record level the previous day for the ninth time in 2025. The Dow industrial average dropped by -0.32%, equating to a loss of 142.30 points, settling at 44,342.19.
Mixed Trading Results
For the trading week, the indices showed mixed results but were mostly higher. The Dow saw a decline of -0.07%, while the S&P grew by 0.59%. The NASDAQ showed a rise of 1.51%, and the Russell 2000 increased by 0.23%.
Given the split performance with technology leading the way, we see a market with narrowing leadership. This divergence, where one index hits records while another falters, suggests that the rally is not broad-based. This creates specific risks and opportunities for derivative traders.
Our view is that this narrow strength makes the market vulnerable. According to recent Bank of America research, the top five stocks in the S&P 500 now account for over 25% of the index, a concentration level not seen in decades. We believe traders should consider purchasing put options on the NASDAQ 100 ETF (QQQ) to protect against a potential pullback in the over-extended tech sector.
The cost of this insurance remains relatively low, creating a favorable setup. The CBOE Volatility Index (VIX) has been trading below 14 for most of the past month, which is historically cheap for buying options. A small allocation to VIX call options or S&P 500 put options could provide significant returns if market uncertainty spikes.
Relative Value Trades
We also see an opportunity in relative value trades. One could use options to bet on a convergence between the high-flying NASDAQ and the lagging Dow Jones Industrial Average. This could involve selling call spreads on the tech index while buying call spreads on the industrial index, a strategy that profits if the performance gap closes.
This market environment is reminiscent of the late 1990s, where the NASDAQ surged while other indices lagged before a major market downturn. That period also featured extreme concentration in a handful of technology stocks. While history doesn’t repeat exactly, it provides a cautionary tale against chasing a narrow rally without protection.
Federal Reserve policy also suggests a cautious stance is warranted. With the latest Consumer Price Index data showing inflation remains persistent, policymakers have signaled they will likely keep interest rates higher for longer than previously expected. This macroeconomic headwind could eventually weigh on the high-valuation growth stocks that are currently leading the market higher.
