The Dow Jones Industrial Average went up on Monday, thanks to gains in the financial and materials sectors related to AI advancements. This rise comes as stock markets aim to finish the year strong ahead of the Christmas holiday. The New York Stock Exchange will close early on Wednesday, and trading is expected to quiet down as many investors take a break for the new year. Stocks in the construction materials sector rose nearly 1.5%, while banking stocks increased by 1.3% following the Federal Reserve’s third straight interest rate cut.

Market Reactions to Inflation Data

Despite some issues in the latest Consumer Price Index (CPI) report, market reactions to recent inflation data are calm. A recent US government shutdown delayed essential data collection, resulting in missing key inflation figures. This includes a report showing zero percent change in rents and shelter costs. Investors are being careful, waiting for additional rate cuts while also cautious about the existing CPI report due to the data downtime. The upcoming US ADP Employment change and GDP growth figures will provide crucial economic data before the holiday market break, showing continued weakness in the labor market. GDP growth is expected to slow to 3.2% in the third quarter. With markets remaining positive in this shortened trading week, many are hoping for a “Santa Claus rally” to finish the year. Historically, the S&P 500 has gained an average of 1.3% during the last five trading days of the year and the first two days of the new year. Traders may consider short-term call options on index ETFs like SPY or DIA. However, with early market closures on Wednesday, the chance for this rally is fading quickly. Low trading volume might increase price swings, making this a great time to look into volatility strategies. The CBOE Volatility Index (VIX) is currently at approximately 13, which is low and could make call options on the index a cost-effective hedge against unexpected market shifts. Given the uncertainty surrounding the flawed CPI inflation data, protecting our long positions is a wise choice.

Strength in Financials and Materials

We are seeing positive movement in financials and materials, buoyed by the Federal Reserve’s third rate cut and hopes for more easing in 2026. This trend resembles the rally from late 2023, when the Fed suggested it was done with rate hikes, prompting growth in interest-rate-sensitive stocks. Call options on ETFs like XLF for financials could capture more gains if this positive feeling continues. Tuesday’s release of ADP employment and GDP figures marks the last major economic event of the year and could significantly impact the market. The expected Q3 GDP growth is 3.2%. If this forecast is missed, it could quickly change the recent positive sentiment. We should be ready for any downside surprise, making protective put options on major indices an important strategy in the next 48 hours. Create your live VT Markets account and start trading now.

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