The S&P 500 closed this past Friday above all-time highs from Feb 2020, pushing equities to new stretched valuations. With the Nasdaq-100 also closing at all-time highs, coupled with negative divergence, investors are asking, how long can this go on for? The answer is, the market can remain irrational for fairly extended periods of time, often measured in weeks or months. Risks remain elevated with 25% of the S&P 500’s market cap concentrated in not only a few names but within one sector. We are keeping a close eye on the US Yield curve as investors digest Fed minutes from this week and the risk of fiscal policy missteps. Our base case is for the US 10 Year Yields to decline below 60bps and for equities to continue grinding higher. However, if yields reverse higher from here, that could trigger a sell-off for equities.
NVDA Trade Idea:
On CNBC’s OptionsAction show on Friday, Tony Zhang looked at HD and the shift in consumer spending away from travel and entertainment towards home improvement. With a 9x increase in employees working from home, coupled with multi-year high housing starts, consumers are shifting their spending habits towards the home. HD with the largest market share of DIY and professional homebuilders seeks to benefit from this bright spot in the economy. Expecting HD to trade higher, Tony is selling an Oct 2 $277.5/$262.6 Put Vertical @ $5.90 Credit. Due to the move in HD since the trade was published, we suggest adjusting to the Oct 2 $282.5/$267.5 Put Vertical @ $5.30 Credit
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