As 2026 starts, US stock markets opened with caution. The S&P 500 and Nasdaq stayed flat, with strong semiconductor performance balancing issues in the tech sector. The Dow Jones stabilized after a brief dip, remaining close to its starting point for the year. Strategists are positive about US stocks in 2026, with an S&P 500 target of 7,629 suggesting the possibility of double-digit growth. It’s expected that market leadership will spread beyond big tech companies to sectors like regional banks, as some high-priced tech stocks might struggle.

Nvidia And Micron’s Continued Gains

Nvidia and Micron are benefiting from the AI-driven boom that started in 2025, while software companies like Salesforce and CrowdStrike experienced declines. Although 2026 began quietly, 2025 wrapped up strongly, with the S&P 500 rising over 16%, the Nasdaq more than 20%, and the Dow around 13%, all reaching record highs. Furniture stocks increased thanks to delays on tariffs for items like upholstered furniture, helping companies such as Wayfair and Williams-Sonoma. However, US manufacturing activity slowed down as new orders dropped, although job growth picked up, suggesting a stable economic outlook. There is some uncertainty about the Federal Reserve’s leadership, which could affect monetary policy. Warren Buffett’s transition of his CEO role at Berkshire Hathaway to Greg Abel is a significant change, even as investors have lingering questions. With the markets starting 2026 flat after a record-breaking 2025, now may be the time to hedge our long equity positions. After the S&P 500 rose over 25% in 2025, using put options on broad market ETFs, like the SPDR Dow Jones Industrial Average ETF (DIA), can help protect profits against any potential downturn. This strategy keeps us open to upside gains while managing our downside risk during these unpredictable early weeks.

Opportunities In Pairs Trading

The clear divide between strong chipmakers and weaker software companies suggests a promising pairs trading opportunity. The semiconductor-tracking SOX index jumped over 60% in 2025, and this trend seems to be continuing. We could profit by buying call options on a semiconductor ETF and simultaneously buying put options on a software ETF, taking advantage of the ongoing shift in the tech sector. Fed Chair Powell’s uncertain future is likely to cause market volatility, so we should be ready. The VIX, which measures market volatility, is currently near historical lows around 13, making call options on it relatively affordable. Buying these VIX calls for the next few months offers a cost-effective way to benefit from any market turmoil tied to the Fed leadership change. The possibility of a new Fed chair by mid-year influences interest rate expectations, opening opportunities in rate-sensitive derivatives. Current market prices, based on Fed Funds futures, suggest only a 40% chance of a rate cut by June, which could change significantly. We can use options on Treasury bond ETFs to prepare for a more aggressive rate-cutting approach if a more dovish Fed chair becomes likely. Specific events, like tariff delays on furniture, create short-term trading chances. The recent surge in stocks like Wayfair (W) highlights their sensitivity to trade policy updates. We can buy call options to benefit from this positive momentum in the short term or consider puts if it seems the tariff delay won’t be extended. Create your live VT Markets account and start trading now.

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