What Could Be Next for Equity Markets?
What you'll read in this issue:
U.S. Equities Have Soared in 2025
While enthusiasm for AI and expectations of falling rates seem to be fueling equity markets, underlying risks from high valuations and geopolitical tensions remain, meaning this earnings season remains one of many factors on investors’ watch.
Background: Investors are pouring cash into the Mag 7, a group of tech bellwethers led by AI chip giant Nvidia (up around 40% year to date) and followed by Google, Microsoft, Meta, Apple, Amazon and Tesla. These tech giants are investing heavily in AI infrastructure, hoping to reap economies of scale from generative/chatbot applications and other enterprise innovations. But some analysts caution the nascent technology may not have the transformative power many expect.
AI Bubble?: Questions persist around the sustainability of the current AI boom:
- "AI is much bigger than just tech stocks," said Deborah Fuhr, managing partner of ETF researcher ETFGI. "It has the potential to impact almost every industry and how everyone works."
- "We are in an AI tech bubble that could burst in the next 12 months," said Matthew Tuttle, founder of Tuttle Capital Management, though he noted it may take longer. One of the first signs of a pop could come when the current investing frenzy starts showing signs of slowing.
- "I am very worried about tech," said Eddy Elfenbein, a portfolio strategist at Advisor Shares. "If you are looking for bargains, it's not the place. But I am optimistic for the market in the next year, especially in defensive and conservative sectors."
Managing Risk: As these dynamics continue to evolve, Sector futures and options can be important tools for managing sector-specific risk within the U.S. equity space. Year-to-date average daily volume has reached 26k contracts, up 23% versus 2024.
FEATURED ARTICLE
Is the Market Really Sure About Its Direction?
Markets rarely move in a straight line, and the stories behind their fluctuations are often far more complex than a simple news headline suggests.
Background: For seasoned traders and market watchers, understanding not just where a market could be going, but how certain – or uncertain – traders feel about it is crucial. Two powerful, yet often seemingly conflicting, volatility metrics derived from the CME Group CVOL Index offer this insight: the skew ratio and convexity.
- Skew Ratio, or Directional Sentiment: This metric gauges the balance of variance between call (upside) and put (downside) options. A ratio above 1.0 suggests greater variance in calls, signaling a likely bullish or upside directional sentiment. A ratio below 1.0 implies a bearish or downside sentiment.
- Convexity, or Market Uncertainty: This measures the degree of variance in options out-of-the-money (the "wings") compared to those at-the-money. When convexity increases, it means traders are buying more protection on the extremes, signaling a spike in uncertainty and fear of a potentially significant, unpredictable move.
Copper Case Study: A back-and-forth news cycle in April 2025 about proposed copper tariffs caused market participants to seek protection against potential price increases, as copper is used in many critical industries like construction, electrical infrastructure and energy. This was reflected in a rising skew ratio of the front-month copper futures. However, convexity also increased at the same time, suggesting that even while many were anticipating an upside move, there were conflicting sentiments in the market.
Lessons From a 30+ Year Trading Career
Success in trading is about suspending emotion and being adaptable, according to long-time trader Jim Iuorio. In a recent interview, Jim shared his perspective on discipline, adaptability and the enduring importance of risk management.
Trading has its highs and lows. Can you share a particular moment where you felt lucky to be in this business and a time when you felt the opposite?
I started in July 1987, and in October of that year, the S&P cratered by a huge percentage in a single day [an event later called Black Monday]. I worked in currencies for Goldman Sachs, and we flipped over to the S&P pits to assist. I remember feeling like, “the whole world is watching these markets right now.” And it felt really cool to be at the center of it. However, the Great Financial Recession in 2007 and 2008 weighed on me quite a bit. At that point, I was older and not as naive. It was incredibly stressful to see us capitalizing on market volatility while the rest of the world was going to suffer. So I didn't love that and would have liked to have been somewhere else at times.
You still work on the institutional side of the business, but you also have your own account. What’s your approach to personal trading today?
I've been trading my own account at the retail level for 25 years, alongside my work for institutional clients.
I think for anything that’s inside a couple weeks of hold time, technical analysis is more important than fundamental analysis. Fundamental analysis is great for portfolio construction and long-term investment, which I do a lot as well. I’d say I’m 70% technical analysis and 30% fundamental analysis. The fundamental aspect helps me rationalize or adjust my technical decisions.
How Fed Policy Can Impact Corporate Bond Spreads
Looking at the options-adjusted spreads (OAS) between the Bloomberg U.S. Corporate Investment Grade (IG) Index and U.S. Corporate High Yield Very Liquid (HY) Index – which underpin CME Group’s Bloomberg Credit futures – reveals different perspectives on risk and volatility within each of their respective credit markets.
Background: The Federal Reserve’s September interest rate cut triggered a shift in the corporate bond market. Spreads in both high yield and investment grade bond indexes reached near-historical lows, signaling that investors felt positive both about this decision and the Fed’s comments signaling the potential for additional easing this year.
Assessing Sentiment: A comparison of the OAS statistical distributions reveals that HY and IG indexes typically exhibit different levels of volatility.
- The distribution of the HY Index's OAS is skewed to the right, indicating that its OAS is more likely to experience large, sudden increases rather than gradual changes. This sensitivity makes it a powerful barometer for capturing market-wide risk appetite.
- In contrast, the IG Index, which tracks debt from more financially stable companies, demonstrates far less volatility.
Why It Matters: The clear differences in the OAS behavior between the two indexes provide a compelling rationale for trading the spread between them. The HY less IG OAS spread is critical to credit traders who anticipate either a widening or tightening of the gap in credit premiums between the two markets.
Winter Wheat Market Dynamics Shift
The normal relationship between Kansas City Hard Red Winter Wheat (KC HRW) and Chicago Wheat (Chicago) futures has upended in recent months due to unusual supply-side conditions in the present crop year.
Background: Aligning with perceived quality, KC HRW Wheat is normally priced higher than Chicago Wheat, though in times of supply imbalance, the KC HRW-Chicago Wheat spread can invert. The spread has averaged negative since mid-August 2025 on the back of abundant hard red winter wheat supply and lower protein levels.
Yield and Protein: Fuller wheat kernels grown in wetter and warmer climates have a higher percentage of carbohydrate by mass and thus a lower percentage of protein. As such, there is generally an inverse relationship between yield and protein percentage. This year, the USDA projects both SRW and HRW wheat yields to increase over the prior year, suggestive of low protein in the nation’s HRW wheat crop.
Why It Matters: The recent inversion of the KC HRW and Chicago Wheat futures spread offers a powerful lesson: in commodity markets, quality often dictates price more than quantity alone. While KC HRW wheat typically enjoys a premium for its high-protein versatility, growing conditions this year may have yielded an abundance of lower-quality wheat that has weighed down the KC HRW futures contract price, simultaneously making the scarcer, high-protein variety more valuable on the spot market.
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