US stocks bounced back after Trump ruled out military action on Greenland, easing a major market worry. Speaking at Davos, Trump promised not to use excessive force, calming fears that led to earlier market drops. Stocks climbed, Treasury yields fell, and the dollar steadied after recent dips. The Dow Jones Industrial Average rose about 160 points (0.33 percent), while the S&P 500 gained 0.25 percent, and the Nasdaq Composite increased by 0.1 percent. However, despite early boosts, stocks fell back as tariff concerns between the US and Europe continued. Trump’s comments on Greenland negotiations kept geopolitical worries in the spotlight.

Sector Performance

Sector performance showed targeted gains rather than widespread recovery. Bank stocks performed well after Trump suggested a 10 percent cap on credit card interest rates, leading to modest gains for major banks. Bond prices increased after Trump’s comments, softening Tuesday’s market shock, which was the worst for US equities since October. European lawmakers paused the approval of the July EU-US trade deal due to Trump’s proposed tariffs on European goods tied to Greenland. The Supreme Court raised questions about Trump’s power to dismiss Federal Reserve Governor Lisa Cook, highlighting the Fed’s independence. The Dow Jones Industrial Average consists of 30 US-traded stocks and is weighted by price rather than market capitalization. Traders can explore options like ETFs, futures contracts, and mutual funds linked to the index. With the immediate threat of military action off the table, market volatility is starting to ease. The VIX index, which measures implied volatility, likely spiked above 30 recently but has now calmed to the low 20s. This level still indicates significant anxiety among traders compared to the calmer conditions seen at the end of 2025. For those trading derivatives, this isn’t a time to be overly optimistic, but rather to protect against remaining known risks. Consider buying put options on major market indices to guard against losses from the ongoing US-Europe tariff talks. Using longer-dated options set to expire in March or April would offer protection during this period of heightened geopolitical uncertainty.

The Suspension of the Trade Deal

The pause in the EU-US trade deal poses a direct risk for American companies with strong sales in Europe, especially in technology and consumer discretionary sectors. There’s a growing interest in purchasing puts on large-cap stocks that make over 25% of their revenue from Europe. This strategy helps isolate risk from the broader market recovery. The Supreme Court’s focus on the independence of the Federal Reserve introduces a new element for interest rate derivatives. This political pressure comes at a time when we analyze the December 2025 inflation report, which showed core CPI still above 3%. Any perceived threat to the Fed’s authority could lead to abrupt moves in Treasury futures, making straddles a suitable strategy given the potential for increased rate volatility. Since the market pulled back from its highs, we can use options to manage risk on new positions. Selling credit spreads, like a bear call spread on the S&P 500, allows us to collect premiums while believing that upside potential will remain limited by unresolved trade issues. This approach is beneficial in a sideways market with still-high option premiums. From a Dow Theory standpoint, we are closely monitoring the Dow Jones Transportation Average for signs of confirmation of this rebound. Transports have lagged behind industrials, which historically indicates underlying economic weakness and suggests a lack of confirmation for the main trend. Until both indices rise together, we should be cautious and avoid making large, unhedged long positions. Create your live VT Markets account and start trading now.

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