The Macro Picture
Oil and the 10-year yield are driving the market right now. There is about a 70% chance of a rate hike next week from the FOMC. Oil is holding above $100 a barrel, which breaks the usual pattern - in past conflicts of this kind, oil often fell after the escalation. That is not happening now. Crude is staying bid, and the pressure shows up in the 10-year yield at 4.9%.
Now that the 10-year is above 4.8%, the next upside target for the yield is around 5.17%, a level last seen in 2007. These are multi-decade highs, and this is my biggest worry for the broader market.
The S&P 500 tells a cautious story. Momentum has slowed a lot over the past three to four weeks. Under the surface, market breadth is poor - few stocks are pushing higher. Across sectors, only energy and a bit of utilities are outperforming; most sectors are lagging. Combine weak breadth, fading momentum, and a 4.9% 10-year yield, and the setup looks risky. The S&P cracked 7,600 this morning; the next downside target is around 7,100. In these conditions, I am focused on hedging downside risk from a macro view.
Energy and Devon Energy (DVN)
Energy was the only sector that finished yesterday in positive territory, thanks to the jump in oil prices tied to the Middle East escalation. Almost any energy name works for upside right now. Brent is above $100 and WTI is above $100, which keeps cash flows strong and keeps these names bid into the last quarter of the year.
Devon Energy (DVN) is one I have been playing for weeks. It broke out above $47.50 and looks set to break above $50, which targets $53 - the 52-week high. Exxon (XOM) and ConocoPhillips (COP) are other names that give upside exposure to oil.
Because energy has already run up over the past few weeks, my preferred trade structure on Devon is to sell premium, especially since implied volatility in oil stays high. The setup: go out to the October 9th weekly expiration and sell a $49/$46 put spread. That is an at-the-money put spread with limited downside protection from buying the $46 put. Earlier today you could collect a little over $1 for this $3-wide credit spread, giving about a 1.3 to 1.4-to-1 risk-to-reward ratio - attractive for a credit spread on an energy name.
AMD
A note from Piper Sandler this morning says AMD (AMD) is about to enter its biggest growth phase yet. AMD is up 137% year to date and up 219% over the last 52 weeks.
Within technology, software led strength over the past four to five weeks, but that is flipping - software is moving to the back seat and select semiconductors are taking over. The overall tech sector stays relatively weak, but there are pockets of strength in semis, and AMD fits that. It broke out above $500 on strong volume and strong relative strength - exactly what you want on a breakout. The next upside target is around $585. The AI infrastructure buildout keeps this area strong.
Oracle (ORCL) reports earnings this afternoon, which will give another read on how the market is pricing these names, especially with the 10-year yield near 5%. My view: use options to capture more upside in AMD while limiting downside risk.
