The Federal Reserve has cut interest rates by 25 basis points and plans to buy $40 billion in Treasury Bills over the next month. This move led to the strongest reaction in US stocks after a Fed meeting in nine months.

Positive Market Reaction

Even though the Fed is divided and there’s uncertainty about future policies, stocks went up because of the positive response to the Fed’s actions. The Fed upgraded its growth forecast, surprised the market with Treasury purchases, and maintained its rate-cutting cycle, which all helped boost stock prices. Additionally, the price of gold rose significantly after the Fed’s meeting. This increase may be due to worries about possible economic stagnation or how gold tends to follow stock movements. US stock gains were especially strong in materials and industrial sectors, while tech stocks lagged behind. Oracle’s latest earnings report showed lower revenue than expected, causing its stock to drop by 10%, even though it had strong contract growth and ambitions in AI. Recent events, including the Fed’s actions and Oracle’s results, could indicate a turning point for stocks. The equal-weighted S&P 500 index has started to do better than its market cap-weighted version, showing a shift away from the dominance of big tech. With the Federal Reserve cutting rates and injecting $40 billion into the market this month, we can expect less volatility in the coming weeks. The CBOE Volatility Index, or VIX, has dropped below 14, a level we haven’t consistently seen since the rate hikes began in 2024. This environment favors strategies like selling options premium, such as covered calls or credit spreads on broader market indexes.

Impact On The Dollar And Treasurys

The Fed’s actions are putting significant pressure on the US dollar and Treasury yields. The U.S. Dollar Index (DXY) has fallen sharply to around 102.50, while the 10-year Treasury yield has dropped toward 4.10%. Traders might consider options on currency ETFs to bet on further dollar weakness, benefiting multinational corporations and commodity prices. There’s a clear shift away from expensive AI-related tech stocks toward more economically sensitive cyclical stocks. The Russell 2000 index of small-cap stocks recently reached a new record high, outperforming the tech-heavy Nasdaq 100 by over 2% this week. This suggests that buying call options on cyclical sector ETFs like materials (XLB) and financials (XLF) could be a smart investment. The poor performance of market leaders after Oracle’s earnings serves as a warning for the AI sector. Despite significant contract growth, investors are punishing companies for high capital spending, which could impact stocks like Nvidia. We could hedge against a deeper market correction by considering put spreads on specific big tech stocks or the Nasdaq 100 ETF (QQQ). This situation echoes what we observed in late 2019 when the Fed initiated “not-QE” to support money markets. That liquidity boost led to a strong rally in stocks into early 2020. Given this history, selling out-of-the-money puts on the S&P 500 may be a strategy to take advantage of this new wave of liquidity from the Fed. However, uncertainty remains high, as the Fed is still divided, and Fed Chair Powell’s term ends in May 2026. Market expectations, as reflected in Fed funds futures, suggest a slightly more aggressive rate-cutting path than what the Fed has indicated. This divergence could create volatility around future inflation data, making defined-risk options strategies wiser than taking on unlimited risk. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now