The Dow Jones Industrial Average (DJIA) bounced back from a small decline, even though it faced challenges from major stocks. Q2 earnings mostly beat expectations, sending major indexes to record highs, but the Dow struggled with downward pressures. In June, Durable Goods Orders dropped by 9.3%, the largest two-month decline since the pandemic, yet it was better than the anticipated decrease of 10.8%. Orders, excluding vehicles, increased by 0.2% month-over-month, even though the automotive sector faced issues from global tariffs and high import taxes.

Trade Agreement Rumors

Rumors about a potential trade agreement between the US and EU continue, but concrete details are lacking. The Trump administration aims to secure trade deals by August 1. While some announcements have been made, there is little substantial documentation. The Dow’s recovery brings it close to all-time highs, although it lags behind tech-heavy indexes. The US Census Bureau’s Durable Goods Orders data is essential for measuring US production activity, with high numbers usually being good for the USD. This information carries risks and uncertainties and is meant for guidance only. Readers should thoroughly investigate before making investment decisions, as there are no guarantees, and the risks—including total investment loss—are the investor’s responsibility.

Market Signals

Given the mixed signals from the market, we recommend that traders pay attention to the low cost of options. The CBOE Volatility Index (VIX) is currently under 15, a historically low level that indicates some complacency in the market. This makes it a good time to buy protective puts or arrange hedged positions, like collars, at a lower cost. We notice a significant gap in performance between the industrial average and tech-focused indexes, and this trend has gotten stronger this year. As of early June 2024, the Nasdaq 100 has risen over 12% year-to-date, while the Dow is up only about 3%. This divide suggests that strategies like pairs trading, which capitalize on tech outperforming industrials, might be beneficial. Although the recent durable goods data exceeded low expectations, there are signs of weakness beneath the surface. The latest report from the US Census Bureau showed that orders for non-defense capital goods excluding aircraft, a key measure of business investment, were unchanged. This stagnation in core business spending signals caution in the industrial sector, supporting a negative outlook for related stocks. Ongoing uncertainty regarding trade policy adds extra risk that we believe is not fully appreciated. The possibility of wide-ranging new tariffs, as mentioned by figures like Trump, could disrupt supply chains more significantly than the market currently anticipates. Using long-dated options to hedge against potential volatility spikes during major political events appears wise. The current positioning in the options market raises concerns for us. The equity put-call ratio is hovering around two-year lows, below 0.60, indicating an overwhelming preference for bullish call options over bearish puts. Such one-sided sentiment has often led to market pullbacks in the past, serving as a contrarian signal to prepare for a possible downturn. Create your live VT Markets account and start trading now.

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