Insights 
VT 
The Dow Jones Industrial Average (DJIA) experienced a decline on Tuesday, losing nearly 300 points from the previous closing. This downturn came amid concerns that the AI tech enthusiasm might have led to an overly concentrated stock market with questionable revenue strength. The index dropped to its lowest intraday level in over a week, bottoming at 46,840 before stabilising around 47,000.
Over 300 stocks on the S&P 500 closed in the red, despite small gains on Monday, due to a tech rally supported by a few top stocks. Key figures from Goldman Sachs and Morgan Stanley have warned of potential broad-market pullbacks of 10-20% over the next one to two years. The Dow is now slightly over 2% below its recent peak of 48,000.
Palantir Shares Face Challenges
Palantir’s shares fell by over 7% on Tuesday, despite beating Wall Street earnings predictions. The company is facing challenges in delivering significant revenue gains in its AI segments. ADP Employment Change figures for October are expected on Wednesday, although they often do not align closely with official US data.
The DJIA is a price-weighted index comprising the 30 most traded US stocks. Economic factors such as company earnings, macroeconomic data, interest rates, and inflation influence its performance. Dow Theory suggests a method for trend identification by comparing the DJIA and Dow Jones Transportation Average directions.
Trading the DJIA can be done through ETFs, futures, options, and mutual funds, offering diverse methods to gain exposure to the index. Various strategies exist to engage with its movements, including the SPDR Dow Jones Industrial Average ETF, futures contracts, and mutual funds.
We are seeing a concerning shift in the market as the Dow Jones has pulled back over 2% from its record high near 48,000 just last week. The recent sell-off in AI-related stocks highlights a critical lack of market breadth, where the rally was supported by only a few key names. This narrow leadership is a classic warning sign that the broader market may be weaker than it appears.
Concerns for the Broader Market
Looking back, the Dow Jones Transportation Average failed to confirm the Industrial’s new high last week, a bearish divergence according to Dow Theory. We’ve seen the CBOE Volatility Index (VIX) jump to 17.5 in recent days, up from the low teens it held through October 2025, signaling rising fear. This suggests traders are starting to price in more significant price swings in the near future.
Given the warnings from major bank CEOs of a potential 10-20% correction, we believe it is prudent to consider protective strategies. Buying put options on index ETFs like the SPDR Dow Jones Industrial Average ETF (DIA) can provide a hedge against a significant downturn. This move allows for downside protection while capping the maximum loss at the premium paid.
For those who are uncertain about direction but anticipate increased choppiness, using options to trade volatility is a viable approach. With the crucial Nonfarm Payrolls report on hold due to the ongoing government shutdown, all eyes will be on tomorrow’s ADP employment figures. Any significant surprise in this data could trigger a sharp market reaction, making straddles or strangles potentially profitable.
We can also look at individual names that seem overextended, like Palantir, which fell sharply despite a positive earnings report. The market is now questioning its extremely high valuation, a sentiment that may spread to other AI darlings. Selling call spreads on such stocks could be a way to capitalize on a potential decline or sideways consolidation.
