Insights 
VT 
Dow Jones Market Impact
The Dow Jones dropped 0.65%, the S&P 500 by 0.63%, and the Nasdaq 100 by 0.47% on Thursday. Zions Bancorporation’s stock plunged 13% over its reported third-quarter loss, and Western Alliance’s shares decreased by almost 11% due to a lawsuit announcement. Rising US-China trade tensions, with US officials criticizing China’s rare earth export restrictions, have intensified concerns.
The US government shutdown also contributes to risk-off sentiment, with the Senate failing to pass funding bills, prolonging the impasse into the following week.
Hedging Against Market Losses
Given the sharp downturn in US index futures, we see the immediate move is to hedge against further losses. The CBOE Volatility Index (VIX) surged over 15% this past week to close above 22, indicating rising fear that we can capitalize on by buying put options on broad market ETFs like SPY. This defensive posturing is crucial as the market digests the negative news flow heading into the weekend.
The disclosures of loan fraud from regional banks are creating a direct and obvious vulnerability in the financial sector. We have seen this playbook before during the regional banking turmoil back in 2023, and the response should be to initiate bearish positions on the SPDR S&P Regional Banking ETF (KRE). Recent data from the FDIC shows a 5% increase in non-performing commercial loans for mid-sized banks in the last quarter, supporting the thesis for buying puts or shorting futures on this specific sector.
Market Strategies Amidst US-China Tensions
The combination of US-China tensions over rare earths and the prolonged government shutdown creates a powerful headwind for the entire market. The Congressional Budget Office’s updated forecast this week suggests the shutdown is now shaving 0.2% off quarterly GDP for every week it continues, justifying short positions on S&P 500 (ES) and Nasdaq 100 (NQ) futures. This also makes options collars on tech-heavy ETFs like QQQ or outright put purchases on the SOXX semiconductor index a prudent hedge against escalating geopolitical rhetoric.
We are observing that high-growth technology stocks are being hit harder than industrial names, with Nasdaq futures falling more sharply than the Dow. This divergence suggests a pairs trading strategy, going short Nasdaq 100 futures while buying Dow futures to capitalize on the flight to perceived safety. This rotation mirrors patterns we observed during the interest rate hike cycle of 2022, when the Dow significantly outperformed the Nasdaq during periods of market stress.
