US equities were mixed as geopolitical tensions lifted oil but left most indices steady. The Dow fell about 0.4%, or roughly 200 points, to near 50,800 after last week’s highs above 51,100, while the S&P 500 slipped marginally and the Nasdaq Composite was close to flat. Iran’s state-linked Tasnim said Tehran had stopped relaying messages to the US via intermediaries and intended to fully close the Strait of Hormuz while activating the Bab-el-Mandeb Strait, with demands tied to Israel’s operations in Lebanon and Gaza. The move followed reports of Iranian ballistic missile fire at US forces in Kuwait overnight. About a fifth of global oil moved through Hormuz before the war, and crude rose close to 5% on the threat.
Tech strength helped offset broader caution. Nvidia rose around 4% to 5% after announcing a new AI laptop chip at Computex in Taipei, while Microsoft added more than 2% and IBM and Micron each gained more than 5%. Berkshire Hathaway agreed to buy Taylor Morrison for about $6.8 billion in cash, around a 24% premium to Friday’s close, sending the homebuilder up more than 20%. Outside equities, the US dollar firmed about 0.3% and Treasury yields climbed, weighing on gold and silver, while Bitcoin slid towards $70K on a tenth straight day of exchange-traded fund outflows. On the data front, ISM Manufacturing PMI for May came in at 54 at 14:00 GMT versus 53 expected, while prices paid eased to 82.1; attention then turns to JOLTS, ADP, ISM Services, jobless claims and NFP on Friday at 12:30 GMT, with 85K expected versus 115K prior.
Positioning for Volatility and Energy Shocks
With the market shrugging off major geopolitical threats, volatility seems incredibly cheap. We see the VIX Index hovering near 13.5, a level that historically does not reflect the risk of two major oil chokepoints closing down. We are buying out-of-the-money VIX calls as a low-cost way to position for an overdue shock to this complacent market.
The 5% surge in crude oil might just be the beginning if the Strait of Hormuz situation worsens. Historically, supply disruptions in this region have led to much larger price shocks, such as the sustained rally during the Iran-Iraq war in the 1980s which kept prices elevated for years. We are adding to our call positions on the XLE energy sector ETF to capitalize on what could be a prolonged period of higher energy prices.
Tactical Trades Across Equities, Bonds, and Housing
The split between strong tech and a weaker Dow presents a clear opportunity. We are positioning for this divergence to continue by buying call spreads on the Nasdaq 100 ETF (QQQ) while simultaneously buying put spreads on the Dow Jones ETF (DIA). This structure lets us bet on AI’s resilience while hedging against weakness in more traditional, energy-sensitive sectors.
The bond market is telling a more honest story about inflation risk than stocks are. With CME FedWatch futures now pricing in a greater than 60% chance of a Fed rate hike by September, we expect more pressure on long-duration bonds. We are buying puts on the iShares 20+ Year Treasury Bond ETF (TLT) ahead of this week’s key jobs data.
Berkshire Hathaway’s purchase of a homebuilder is a significant vote of confidence in a rate-sensitive sector. Despite the Fed’s hawkish stance, this signals that major players see underlying value and demand in US housing. This leads us to look at call options on the homebuilders ETF (XHB), as a contrarian play against the short-term rate fears.
