MARKET WRAP

As discussed in yesterday's email and during MRKT Call, rising treasury yields create a challenging environment for equities. We saw this play out today, as yields climbed across the curve—from the 3-month to the 30-year—following the ISM services PMI, and equities reversed from a green open. The S&P 500 (SPX) nearly touched 6000 at the open but ended the day -1.1%. QQQ’s closed -1.9%. Highlighting the affect of treasuries, TLT started the session higher but declined throughout the day, now sitting just $3 above its multi-year lows. Rising yields appear to be capping further market gains and could eventually exert enough pressure to push equity prices lower. (A reversal in Treasury yields could provide an upside catalyst for stocks too.) Notably, the VIX closed near 18 was nearly 19 intraday. While this level isn't extreme by historical standards, it is relatively high given how near the market is to all-time highs, signaling growing uncertainty. NVDA’s reversal today was symbolic of the market action, opening at $153 and matching its late November high before reversing lower and closing -6.2% at $140. It is important to note that this was a heavy volume trading day, with Nasdaq and others setting volume records.

MRKT MATRIX: January 7, 2025

Today’s Top Stories:

• Dow tumbles more than 200 points, Nasdaq loses 2% as Nvidia leads tech rout (CNBC)

• Reasons why Deutsche Bank thinks 2025 can be another banner year for the stock market (CNBC)

• Credit Markets Signal Warning for a Relentless Equity Rally (Bloomberg)

• MoffettNathanson downgrades Apple to sell on ‘decidedly unattractive’ outlook (CNBC)

• Bank of America downgrades Tesla due to high valuation and risks to EV maker’s strategy (CNBC)

• Even With an Office Glut, Firms Can’t Find the Kind of Space They Want (WSJ)

• US corporate bankruptcies hit 14-year high as interest rates take toll (Financial Times)

• Anthropic in talks to raise funding at $60 billion valuation (WSJ)

• Meta Ends Fact-Checking on Facebook, Instagram in Free-Speech Pitch (WSJ)

Today’s MRKT Call is Presented by Robinhood

Is Nvidia Nearing “The Danger Zone?”

In today’s MRKT Call, Guy and Dan kick off with a discussion on rising treasury yields. Guy highlights a key point: the FOMC and Treasury yields seem misaligned, with 4.7% on the 10-year yield emerging as a critical level to watch. The conversation then shifts to the DXY, examining whether the strengthening dollar could start impacting multinational companies. They also touch on the rate-sensitive IWM, which is hovering around its 150-day moving average after fully retracing its post-election gap higher. Next, they do a quick analysis of sectors and stocks, including XLV, MRK, and TMO, as well as XLP, KO, and PEP, segueing into calls of the day on AAPL and TSLA. After, your questions, with MU in focus, then Guy’s Chart of the Day with today’s NVDA action. Finally, some option trade ideas in XLE and XOM.

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Today’s Okay, Computer. is Presented by RBC and Current

Semi Charmed Life Cycle with Gene Munster

Dan Nathan and Gene Munster from Deepwater Asset Management discuss the current state of the semiconductor market, emphasizing strong performances from tech giants driven by positive forecasts from Foxconn. They delve into hardware trade concerns, Nvidia's outlook, and custom Silicon developments with Broadcom and Marvell. The conversation also touches on potential market risks from macroeconomic factors, software applications of AI, and industry-specific AI use cases in sectors like retail and content creation. Gene offers insights into the future trajectories of these trades while highlighting the challenges and opportunities ahead.

What’s Next?

SPX/SPY options are pricing in about a 1.2% move for the rest of the week, despite the market being closed on Thursday. Much of this expected movement hinges on Friday's NFP jobs report, which could serve as a key catalyst for the market’s direction. Looking further out, options are pricing a roughly 4% move through the February 21st expiry, with implied volatility (IV) at about 14.

For QQQ, options are pricing in a 1.5% move for the remainder of the week and a 5.5% move by February 21st expiry, with IV at approximately 19.

During this timeframe, several notable events could drive markets: two significant jobs reports, the late-January FOMC meeting, and the bulk of earnings season, which kicks off next week with major banks and runs through Nvidia's report, expected on February 19th.

Historically, February and March tend to be volatile for equities, second only to the Fall months. While implied volatility currently reflects only mild expectations for this potential, the ongoing market consolidation could present opportunities to hedge or position for a breakout in February or March.

The options market is signaling such positioning has been happening, as indicated by elevated SKEW (reflecting demand for out-of-the-money calls and puts). However, SKEW has come off its highs as at-the-money volatility increases, as reflected in the VIX. The window for relatively inexpensive positioning is narrowing as the VIX climbs out of its holiday trading lull. That said, a “Goldilocks” jobs number on Friday could offer another opportunity to position directionally at more inexpensive option premiums.

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