Dow Jones Futures increased by 0.32% to 44,850 during European hours before the US market opened. S&P 500 Futures rose 0.28% to 6,360, while Nasdaq 100 Futures climbed 0.13% to about 23,250. The markets gained after the announcement of a trade deal between the US and Japan. This deal will impose a 15% tariff on Japanese exports to the US, and Japan has agreed to invest $550 billion in the US. Market watchers are also looking forward to important earnings reports from major tech companies like Tesla and Alphabet.

Dow Jones and S&P Performance

The Dow Jones increased by 0.4%, while the S&P 500 rose by 0.06%. However, the Nasdaq Composite fell by 0.39% because semiconductor stocks dropped. Nvidia was down 2.4%, and Broadcom fell by 3.3% due to reports of a pause in an AI venture involving SoftBank and OpenAI. Investor confidence dipped after some companies reported disappointing earnings. Lockheed Martin’s shares fell by 10.8%, Philip Morris decreased by 8.2%, and General Motors dropped by 8% over concerns about tariffs impacting profit forecasts. The Dow Jones Industrial Average includes the 30 most traded stocks in the US and is price-weighted. Its performance is influenced by company earnings, economic data, and interest rates set by the Federal Reserve. A clear divide appears between the industrials and technology sectors, suggesting that a paired trading strategy could work well. With the Dow showing strength, we see potential for bullish strategies on its components while hedging with bearish positions on the tech-heavy index. The CBOE Volatility Index (VIX) has been trading below its long-term average near 14, making options pricing favorable for these strategies.

Trade Agreement Impact

The new trade deal is expected to help industrial and manufacturing stocks, which are significant within the average. We are preparing for increased investment flows into the US, recalling past instances where similar foreign investments boosted domestic infrastructure. This supports a preference for industrials over technology in the short term. With earnings reports from major tech firms approaching, we expect notable volatility. Historically, significant electric vehicle companies have experienced average price swings of over 9% after earnings, offering opportunities for strategies like straddles or strangles that benefit from large price movements. Buying protective puts on indices like the QQQ could provide a smart hedge against any negative surprises from these large companies. The weakness in semiconductor stocks is a bearish sign for that sector. The VanEck Semiconductor ETF (SOXX) has lagged behind the broader market, recently falling over 5% in the past month due to worries about oversaturated AI demand and the pause in the venture. We think this trend could persist, making bearish put spreads on key names in this sector a compelling option. The weak earnings from aerospace and automotive companies reveal risks beyond the tech industry, indicating a need for a selective investment approach. Recent data from FactSet shows that while overall S&P 500 earnings are projected to grow, the number of companies giving negative pre-announcements has increased by 4% compared to the past five years. This suggests that traders should be cautious about broad market placements and focus on weaknesses within specific sectors. Create your live VT Markets account and start trading now.

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