Insights 
VT 
The Dow Jones Industrial Average saw a decline of 200 points on Monday, testing below the 47,250 level for the first time in over a week. This decline came despite advancements in other indexes driven by the concentrated gains of the ‘Magnificent 7’.
Amazon witnessed a rise of about 5% following its $38 billion investment in OpenAI. Iren secured a $9.7 billion deal with Microsoft to enhance hardware capabilities. Nvidia, benefitting from both AI deals, rose by 3.7% as its technology is integral to the newly announced plans.
Persistent Manufacturing Contraction
The Institute for Supply Management’s October Purchasing Managers Index fell to 48.7, below September’s 49.1, indicating persistent contraction in the manufacturing sector. Demand indicators improved slightly but remain in negative territory, suggesting businesses are facing difficulties in expanding operations.
The Federal Reserve’s communication has become more unpredictable, moving away from previous consensus-driven narratives. Recent Fed speeches, including a cautious stance from Chair Jerome Powell, have led to altered market expectations regarding interest rate cuts.
Uncertainty lingers over potential rate changes, with 65% betting on a December cut according to the CME’s FedWatch tool. The evolving economic landscape, as depicted by the Dow’s decline and ISM’s reports, underscores the current market challenges and Fed policy uncertainties.
Market Performance Discrepancy
We are seeing a clear split in the market where the Dow is struggling while big tech stocks like Amazon and Nvidia are pushing higher. The Nasdaq 100 is up over 35% year-to-date in 2025, while the Dow Jones has only managed a 6% gain, highlighting this massive performance gap. This suggests we should consider strategies that favor technology, such as buying call options on tech-focused ETFs, while potentially buying puts on industrial index funds.
The latest manufacturing report, with its reading of 48.7, shows an eighth straight month of economic contraction, which is a significant warning sign. This sustained weakness is reminiscent of the 2015-2016 industrial recession, a period that led to poor performance for cyclical stocks tied to the real economy. We should therefore look at protective put options on sectors most sensitive to a slowdown, like materials and transportation.
The Federal Reserve’s lack of a unified message is creating notable uncertainty around the upcoming December 10th rate decision. This indecision is reflected in the VIX, the market’s main volatility index, which has crept back up to over 18 from its October lows near 14. An environment like this is well-suited for buying straddles on the S&P 500, as this strategy profits from a large price swing in either direction without us having to guess the Fed’s next move.
While the market still anticipates a rate cut in December with 65% odds, this probability has fallen from over 80% just a few weeks ago. If the Fed disappoints the market and holds rates steady, we could see a sharp sell-off as traders reprice expectations for a January cut. Holding some short-term put options through the Fed meeting could be a wise hedge against this potential negative surprise.
