The NASDAQ 100 (NDX) fell by almost 1.4% on Tuesday morning as US shares weakened. The move followed long-term US Treasury yields reaching their highest levels in 19 years.
Higher yields were linked to rising inflation, which was attributed to Iran closing the Strait of Hormuz. This weighed on growth-focused stocks.
Long Term Yields Pressure Tech
The US 30-year Treasury yield rose to 5.186% on Tuesday. This was its highest since July 2007 and above the 5.178% high seen in October 2023.
The S&P 500 and the Dow Jones Industrial Average also fell by at least half a percentage point in morning trade. The NASDAQ 100 recorded a third straight daily decline.
The index remained near all-time highs ahead of Nvidia’s Q1 fiscal earnings due late Wednesday. The Relative Strength Index (RSI) moved out of overbought territory after trading above 70 since mid-April.
Technical levels cited included the 50-day Simple Moving Average (SMA) near a resistance band around 26,182. A pullback to that area would imply a 9% drop from current levels.
Volatility And Options In Focus
With the US 30-year yield hitting levels not seen since mid-2007, we see a clear headwind for tech stocks. This pressure is reflected in the CBOE Volatility Index (VIX), which has spiked to over 22, its highest point this quarter. For traders, this means the cost of protection is rising, but the need for it is becoming more urgent.
All eyes are on Nvidia’s earnings report this Wednesday, which is shaping up to be a major market-moving event. The options market is currently pricing in a potential 11% move in NVDA’s stock in either direction, a significant jump indicating extreme uncertainty. A long straddle, which involves buying both a call and a put option, is a direct way to trade this expected volatility regardless of the direction.
Given the risk of a 9% pullback in the NASDAQ 100 to its 50-day moving average, holding protective puts is a prudent move. We are seeing traders buying puts on the QQQ exchange-traded fund with expiration dates in late June to hedge their portfolios through this period. This strategy offers a buffer if Nvidia’s results fail to support the market’s high expectations, a lesson many learned during the rate-driven downturn we saw back in 2022.
On the other hand, for those betting that this fear is overblown, selling option premium presents an opportunity. An iron condor on the NDX could be a viable strategy to capitalize on elevated implied volatility. This position would profit if the index remains within a defined range after the Nvidia news passes and the market digests the report.
Beyond this week, the persistent issue of high yields will likely keep volatility elevated, especially with ongoing inflation concerns. The last time we saw yields at these levels in 2023, the market experienced several months of choppy, sideways action. Therefore, longer-dated strategies, such as calendar spreads, could be effective for navigating a market that may remain turbulent for the next several weeks.
