The Dow Jones Industrial Average (DJIA) rebounded, recovering from a previous mild downturn, despite grappling challenges from key overweight stocks. Q2 earnings generally exceeded expectations, pushing major indexes to record highs, but the Dow faced downside pressures.
Durable Goods Orders fell in June by 9.3%, the steepest two-month change since the pandemic, though better than the expected 10.8% reduction. Orders excluding vehicles rose 0.2% month-on-month, amid challenges in the automotive sector due to global tariffs and steep import taxes.
Trade Agreement Rumours
Rumours about a trade agreement between the US and EU persist, but firm details remain elusive. The Trump administration is working towards securing trade deals by August 1, with announcements made, but little actual documentation.
The Dow Jones’ recovery places the index near all-time highs, although it struggles to match its tech-heavy peers. The US Census Bureau releases Durable Goods Orders data, significant for assessing US production activity, with high readings typically favourable for the USD.
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Market Signals
Given the market’s mixed signals, we believe traders should focus on the low cost of options. The CBOE Volatility Index (VIX) is currently trading below 15, which is historically low and indicates a degree of complacency in the market. This makes buying protective puts or structuring hedged positions, like collars, unusually cheap.
We see a significant performance gap between the industrial average and tech-focused indexes, a trend that has accelerated this year. As of early June 2024, the Nasdaq 100 is up over 12% year-to-date, while the Dow has struggled to gain more than 3%. This divergence suggests that strategies like pairs trades, which bet on the continued outperformance of tech against industrials, could be advantageous.
The recent durable goods data, while beating pessimistic forecasts, shows weakness beneath the surface. The latest report from the US Census Bureau indicated that orders for non-defense capital goods excluding aircraft, a key proxy for business investment, were flat. This lack of growth in core business spending points to caution in the industrial sector, reinforcing a bearish outlook on related stocks.
Persistent uncertainty around trade policy adds another layer of risk that we feel is being underestimated. The potential for broad new tariffs, as discussed by figures like Trump, could disrupt supply chains far more than the market is currently pricing in. Using long-dated options to speculate on or hedge against volatility spikes around major political events seems prudent.
Current options market positioning itself serves as a warning sign for us. The equity put-call ratio has been lingering near two-year lows, below 0.60, which shows an extreme appetite for bullish call options over bearish puts. When sentiment becomes this one-sided, it has historically preceded market pullbacks, making it a contrarian signal to prepare for a potential downturn.
