The past week showed mixed performance across major indexes. The Nasdaq Composite ($COMP) reached a new intraday high but closed slightly below its peak, bolstered by the tech sector.
In contrast, the S&P 500 ($SPX) and the Dow Jones Industrial Average ($DJI) ended the week in negative territory. This marked their first weekly decline in seven weeks.
A key factor was the rise in 10-year Treasury yields, which reached three-month highs. Higher yields typically exert pressure on equities, particularly in interest-sensitive sectors like industrials and materials. Meanwhile, consumer discretionary and information technology sectors outperformed, driven by strong earnings from major players like Tesla (TSLA) and General Motors (GM).
Economic Indicators Driving Market Movement
- Consumer Sentiment and Durable Goods: Strong data in these areas boosted Treasury yields, influencing investor behaviour. The 10-year Treasury note’s yield rose by 16 basis points this week alone.
- Federal Reserve Expectations: Despite solid economic indicators, market participants are largely expecting a 25-basis-point cut in the Federal Reserve’s upcoming meeting, with another possible cut by year-end.
GLOBAL CONCERNS
• Global Economic Uncertainty: Ongoing geopolitical tensions, including trade relationships and foreign policy dynamics, continue to impact investor sentiment.
• Inflationary Pressures: Inflation trends both domestically and internationally influence central bank policies, with the potential for rate adjustments.
• Currency Fluctuations: The strength of the U.S. dollar, influenced by global trade and economic factors, remains a crucial factor for U.S. exporters and multinational companies.
Source: CEPR
SECTOR TO WATCH
Sector-Specific Developments & Challenges
- Cyclical Sectors: Industrials and materials underperformed due to their sensitivity to rising yields. Health care and utilities also experienced downturns.
- Consumer Discretionary and Information Technology: These sectors performed well, buoyed by strong earnings reports. Notable companies like Tesla (TSLA), Texas Instruments (TXN), and ServiceNow (NOW) contributed to the strength.
- Communication Services: Another strong performer, partially driven by anticipation around the earnings of tech giants like Alphabet (GOOGL) and Microsoft (MSFT) in the upcoming week.
- Industrials and Materials: The rise in yields created challenges for companies reliant on borrowing and infrastructure investment.
- Defensive Sectors: Interest-sensitive areas like utilities and health care struggled amidst the economic backdrop.
WATCHOUT
HCA Healthcare stock impacted by natural events
HCA Healthcare (HCA) struggled, with a 9% decline due to earnings falling below analyst expectations. This company faced a downturn due to earnings that missed expectations, impacted by natural events like hurricanes, highlighting the vulnerability of certain sectors to external factors.
Downside Risk Focus:
- The higher IV for lower strike PUT options and the concentrated volume around 380 and 400 suggest that traders are preparing for potential downward movements. This aligns with a market that is risk-averse and focused on mitigating downside exposure.
Resistance and Support Levels:
- The heavy PUT volume around the 380-400 strike range could be a key area of support, where traders expect potential price stabilization or are preparing for protective action.
- CALL options show minimal volume, suggesting that traders do not anticipate significant resistance at higher strike levels. This aligns with a subdued expectation for bullish moves.
Investment Opportunity & Risk
Despite the market facing its worst week, there are some stocks that may offer potential opportunities for investors willing to navigate the current volatility.
Tesla (TSLA)
The highlight of the week is the strong earnings report leading to a 22% price increase of Tesla. Tesla‘s performance underscores the resilience of the tech sector, specifically within consumer discretionary.
The lowest IV for both PUT and CALL appears near the 250-270 strike range, indicating a market expectation that the stock price may settle around this range by expiration.
A noticeable spike in volume can be observed:
- PUT options have the highest volume near a strike price of 240.
- CALL options exhibit increased volume at strikes above 280.
- This suggests that 240 and 280 are key levels to monitor.
General Motors (GM)
General Motors posted solid earnings, reinforcing its position in the automotive sector amid a challenging economic landscape.
The lowest implied volatility for both PUT and CALL options is around the 50-55 strike range, suggesting that this is where the market expects the stock’s price to stabilize by the expiry date of November 29, 2024.
The 50-55 strike range appears to be a key support area, given the lowest implied volatility in that region. This means that the market is pricing in stability or minimal movement in this range.
The spike in PUT volume near the 50 strike could imply that many traders see this level as a protective floor—if the stock drops below this, they might expect increased volatility or a shift in sentiment.
Western Digital (WDC)
Western Digital delivered positive surprise, with a nearly 5% increase following strong earnings driven by cloud revenue growth, reflecting broader trends in data storage demand.
CALL Volume:
Noticeable activity spread between 65 to 75 strikes, indicating mild interest in upward moves.
PUT Volume:
Highest at the 60 strike, suggesting it is a key level for protective strategies or hedging. This is a strong support level which indicates the market expectation that price may dip to this level.
Capital One (COF)
Capital One witnessed a rise of 5.23%, thanks to better-than-expected results in its card and auto businesses, showing resilience in consumer finance.
The chart suggests a cautious market with a bearish tilt for lower strikes, but neutral to mildly bullish sentiment for higher strikes. The heavy PUT volume around the 130-140 range highlights a focus on downside risk, while the spike in CALL volume at 160 indicates a target level for potential upward movement. Monitoring changes in volume and IV around these key levels will provide further insights as the expiry date nears.
Volatility Increase in October:
• The spike in both IVCall30 and IVPut30 around October 9 suggests an event or catalyst leading to a period of market concern or uncertainty.
• The sharp rise in PUT volatility towards late October, while CALL volatility stabilizes, suggests a shift towards increased caution or downside protection by market participants.
CONCLUSION
- The U.S. economy and stock market continue to navigate a complex environment. Strong economic indicators, like consumer sentiment and durable goods, paint a picture of a resilient domestic economy.
- However, the rise in Treasury yields and the anticipation of Federal Reserve actions are creating a mixed backdrop for equities.
- International factors, including global trade relationships and inflationary pressures, add another layer of complexity, influencing market expectations and corporate strategies.
- As the earnings season progresses, with major tech giants set to report next week, the focus will remain on sector performance and the evolving economic landscape.
Please note that all information in this newsletter is for illustration and educational purposes only. It does not constitute financial advice or a recommendation to buy or sell any investment products or services.
About the Author
Rein Chua is the co-founder and Head of Training at AlgoMerchant. He has over 15 years of experience in cross-asset trading, portfolio management, and entrepreneurship. Major media outlets like Business Times, Yahoo News, and TechInAsia have featured him. Rein has spoken at financial institutions such as SGX, IDX, and ShareInvestor, sharing insights on the future of investing influenced by Artificial Intelligence and finance. He also founded the InvestPro Channel to educate traders and investors.
Rein Chua
Quant Trader, Investor, Financial Analyst, Vlogger, & Writer.
