The Dow Jones Industrial Average (DJIA) fell behind other major indices, dropping nearly 600 points at its lowest point before recovering slightly, finishing down around 150 points. The AI-focused tech sector, which had faced losses earlier in the week, is bouncing back as investment in the financial and building materials sectors fades.

Concerns About Overvaluations

Concerns about overvaluations continue in the AI tech rally, with cloud computing services and chip producers leading the way. Companies are making multi-billion dollar deals, and how AI firms categorize these costs has raised red flags for financial analysts. The end of the longest US federal government shutdown may bring the delayed Nonfarm Payrolls report. However, it’s unclear if the jobs and inflation data for October will be released. The DJIA tracks 30 major US stocks and is price-weighted, which has led to criticism for not being broadly representative. Various factors influence its performance, including company earnings and economic data from the US and around the world, interest rates, and overall economic conditions. There are different ways to trade the DJIA, such as ETFs, DJIA futures contracts, options, and mutual funds, each offering unique ways to engage with the index. Despite a partial recovery, the Dow’s recent underperformance compared to other indices shows a weakness in the industrial and financial sectors. The CBOE Volatility Index (VIX) has risen over 15% this past month, reaching around 22.5, indicating increasing market anxiety. This highlights a trend where traditional economy stocks are being sold off while investors return to riskier tech investments.

Traders Reentering AI Tech

Traders are returning to AI tech, yet the sector’s high valuations are still a concern. This situation is reminiscent of the dot-com bubble in the late 1990s, when investors overlooked similar worries about circular investments and questionable accounting. The forward Price-to-Earnings ratio for several leading AI infrastructure companies now surpasses 60, a level that often signals a major market correction. In the upcoming weeks, a key challenge is the lack of reliable economic data due to the recent government shutdown. Without the official October jobs and inflation reports, we are operating without clear guidance, making it tough to evaluate the Federal Reserve’s next move on interest rates. This uncertainty increases our reliance on alternative data, like weekly jobless claims, which recently rose to 245,000. Given this situation, using options to hedge existing portfolios seems wise. Buying put options on broad market ETFs like the SPDR Dow Jones Industrial Average ETF (DIA) can help protect against sudden drops. This approach is a straightforward way to safeguard a portfolio from potential political and data-driven risks. We should also explore strategies that can benefit from expected volatility, regardless of market direction. Implementing long straddles on specific volatile tech stocks or the broader indices could be effective, especially in the days leading up to the release of September’s delayed Nonfarm Payrolls report next week, which is likely to cause significant market movement. Looking ahead, the temporary government funding deal, expiring at the end of January 2026, poses a clear event risk. We should be cautious about holding unhedged long positions as that deadline approaches. The political gridlock that led to the previous shutdown could easily return and trigger another market shock. Create your live VT Markets account and start trading now.

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