US equity markets kept rising with strong gains in September. On a daily basis, the S&P 500 went up by 0.5%, the Nasdaq Composite by 0.7%, and the Dow Jones Industrial Average by 0.4%. In contrast, the Russell 2000 fell by 0.7%, while the Toronto Stock Exchange Composite increased by 1.0%. Over the week, the S&P 500 grew by 1.2%, and both the Nasdaq Composite and Russell 2000 saw a jump of 2.2%. The Toronto Stock Exchange Composite also rose by 1.6%, indicating overall positive movement in most indices.

Market Volatility and Opportunity

As the rally continues, market volatility is decreasing significantly. The VIX has dropped to about 13.5, a level not seen since early summer. This makes options contracts cheaper, offering a great chance to buy downside protection, like SPX puts, in case of a pullback in the upcoming weeks. Next week, all eyes are on the Federal Reserve’s meeting. The strong August jobs report, which added 195,000 jobs, gives the central bank a reason to stay firm against inflation. We view this as a major risk event, especially for options expiring next Friday. The decline of the Russell 2000 on Friday is a warning sign, even though it performed well this week. Smaller companies feel the impact of credit conditions and fears of an economic slowdown more acutely, which appear to be re-emerging. One strategy could be a pairs trade, using call options on the tech-heavy Nasdaq 100 against put options on the Russell 2000.

September Effect and Inflation Concerns

We should remember the historical “September Effect,” as this month tends to bring more market ups and downs. Looking back at the sharp declines in September 2022 and 2023, the current calm in the market seems fragile. This means that even a small negative event could lead to significant changes in risk pricing. The latest CPI report shows core inflation remains stubborn at 3.1%, a full point above the Fed’s target. This might prompt a more cautious approach from the Fed chairman, limiting the market’s immediate growth potential. Selling out-of-the-money call credit spreads could be a smart way to generate income while managing risk. Create your live VT Markets account and start trading now.

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