To The Moon

Most of us assumed that CPI and the other data releases would stay relatively tame heading into the US midterms. Instead, the numbers came in hot. September CPI rose 3.7% year over year, a five-month high and above the 3.6% the market was looking for. The bigger surprise was core CPI, which strips out food and energy: it climbed to 2.6% year over year, also ahead of expectations and up from 2.4% the month before.

As things stand, the market is already pricing in another Fed hike before year-end — CME's FedWatch Tool puts the odds at close to 90%. The most direct casualty of a higher-for-longer rate environment driven by sticky inflation is the cohort of tech companies that fund their capital spending with debt. To lock in the computing capacity that the next phase of AI development demands, these firms have signed large, long-dated contracts with data-center operators, and that capex has to be financed either by borrowing or by issuing new equity. A prolonged tightening cycle pushes up the cost of that debt and caps how much of it they can realistically raise. That is precisely why the Nasdaq was the hardest hit of the major indices last week on the back of the CPI print.

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October Seasonality Meets a Hot CPI Print: US Equity Indices Need Short-Term Protection

October has historically been a month in which US equity indices are prone to turning points, and when bearish data lands on top of that seasonality, extra caution is warranted. We have previously suggested tracking the Nasdaq against the middle band of its Bollinger Channel. The index sold off sharply last week and found modest support right at that middle band. The week ahead is a genuinely critical juncture: if the Nasdaq breaks lower from here, it would likely confirm that this year's high is already in, and investors should move to protect themselves over the short term.

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On the hedging side, with the VIX still not especially elevated, buying puts to hedge and protect the value of an equity portfolio is a sound choice. Take Nasdaq futures as an example: at roughly 30,000 points, one futures contract carries about US$600,000 of notional exposure, so a single Nasdaq put is enough to cover it. The same logic applies to a stock portfolio — no additional hedging is needed beyond that.

As for speculative plays, there are two broad routes. The first is a short-term trend trade, betting that the index accelerates to the downside. We put the odds of that on the low side, but for anyone who wants to express the view, 30,200 is a sensible stop-loss level for a short futures position. The second is to sell short-dated options to fade the selloff and play for a bounce; the core premise there is that the pace of the Nasdaq's decline is unlikely to accelerate. Using last Friday's close in Nasdaq futures as the benchmark, you would sell puts struck at least 15% below that level. Last week's rise in the VIX has lifted option premiums across the board, and strikes that far out of the money leave a decent margin for error. In the unlikely event the market does break through the strike, you can simply take delivery of the underlying — buying the dip by another route. That said, we would not run this strategy with long-dated options, to avoid heavy losses if a black swan really does land. Investors can pick whichever approach suits their own risk appetite; with sound risk management in place, you can handle whatever the market throws at you.

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