Earnings Season Shows Strong Growth
Earnings season is looking promising, with 78% of companies exceeding expectations, according to FactSet. Companies like Amazon and Alphabet did well, while Disney faced some difficulties, even though it met analyst targets. Additionally, the US Bureau of Labor Statistics has postponed the latest jobs report because of the ongoing government shutdown, which creates uncertainty for federal operations and data.
Market Volatility and Strategy
Yesterday’s jump in the ISM manufacturing index to 52.6 marks its first growth reading in 26 months. This positive change suggests that cyclical sectors might continue to rise. Historically, such data increases have led to market rallies, like the one in mid-2020 that started a long bull run. Therefore, buying call options on industrial and materials ETFs such as XLI and XLB could be a smart move to take advantage of potential economic growth.
However, the ongoing government shutdown and the delay of the January jobs report leave gaps in information and create significant risks. The last major shutdown in late 2018 led to a nearly 20% market drop before a resolution. To protect against such a scenario, we should consider buying protective puts on broad market indices like the SPY.
Last Friday’s sharp drop in precious metals likely caused implied volatility to spike, presenting us with an opportunity. As markets stabilize, volatility is expected to decrease—a phenomenon known as “volatility crush.” Selling options using strategies like iron condors or credit spreads on indices could be profitable in the upcoming weeks.
In the tech sector, the market is distinguishing between companies. Oracle is being rewarded for its strong cloud growth, while Nvidia is struggling due to uncertainty around its OpenAI deal. This scenario suggests that pairs trading could be an effective strategy. For instance, going long on Oracle call options and buying puts on Nvidia allows us to benefit from specific company news while staying neutral on the broader tech sector.
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