Is it Time to Get Bullish on U.S. Equities Using the Nasdaq 100?

Are the 10-year Treasury yields hitting a wall at 5%? It may be time to get bullish on U.S. equities using the Nasdaq 100. Here’s a strategic way to approach relenting yields and a bounce in tech (rate-sensitive) stocks.

Federal Reserve’s Stance on Interest Rates

Federal Reserve Chairman Jerome Powell recently acknowledged continuing signs of cooling inflation but also stated that the central bank will remain committed to its 2% mandate. His speech has decreased the likelihood of another rate hike in 2023 and increased the chances of a pause at the December meeting. This indicates that the Fed may be done raising rates.

The Impact on Treasury Yields

The 10-year Treasury yields have experienced an unrivaled parabolic move, starting at 1.55% in 2022 and reaching approximately 3.75% in 2023. However, following Powell’s speech, there was volatility in the market as investors tried to understand the timeline associated with the Fed’s stance. Additionally, mortgage rates have reached the highest level since 2000.

Positive Start in the Earnings Season

Looking past the Fed, the Q3 earnings season has started positively, with most companies beating estimates and providing reassuring guidance for the coming quarters.

A Risk Reversal Trade for a Bullish View

Considering the potential relenting of yields and the Nasdaq 100’s rate sensitivity, a risk reversal trade can be utilized to capitalize on a bullish view. This strategy involves selling an out-of-the-money put option and using the premium collected to buy an upside out-of-the-money call option. The goal is to establish a bullish view for a credit.

The Catch and Risk of the Strategy

While this strategy may appear to have no cost or even a credit, there is a catch. If the ETF’s movement does not align with the investor’s prediction, they may be forced to buy the stock at the short put strike price. This strategy is considered risky and could result in significant losses. However, it still offers a better outcome than purchasing the stock outright.

Disclaimer: This content is for informational purposes only and should not be considered as financial, investment, tax, or legal advice. Individual circumstances may vary, and it is recommended to seek advice from a financial or investment advisor before making any financial decisions. Click here for the full disclaimer.