The Dow Jones Industrial Average (DJIA) increased on Wednesday, briefly reaching over 46,600 before stabilizing. Currently, Wall Street’s quarterly earnings reports are exceeding expectations, especially in investment banking and luxury goods, even amidst ongoing US-China trade tensions and the prolonged US government shutdown.

Morgan Stanley and LVMH Thriving

Morgan Stanley and Bank of America both reported better-than-expected earnings, with their shares rising by 6% and 5%, respectively. French luxury brand Moet Hennessy Louis Vuitton SE saw its shares jump more than 12% after strong earnings, boosting optimism for record-breaking profits. The ongoing US government shutdown, caused by a lack of funding resolution, is delaying official data releases but may allow the Federal Reserve to cut interest rates twice before the year ends. The DJIA is a historic stock market index that includes 30 major US stocks. It is price-weighted, meaning the stock prices affect the index more than the size of the companies. Critics argue that it doesn’t fully represent the market, unlike the more diverse S&P 500. The DJIA’s performance depends on company earnings, macroeconomic data, and Federal Reserve interest rates, which impact market sentiment, credit costs, and inflation. Dow Theory, created by Charles Dow, helps identify market trends by comparing the direction of the DJIA and the Dow Jones Transportation Average (DJTA). Trend phases include accumulation, public participation, and distribution. Investors can trade the DJIA through ETFs like the SPDR Dow Jones Industrial Average ETF, DJIA futures, options, and mutual funds, allowing for diversified investment. Australia is set to release its employment report for September, expected to show an addition of 17,000 jobs and an unemployment rate of 4.3%. Recent months have seen similar modest job growth. With the Dow Jones exceeding 46,600, the market is clearly focused on strong earnings from banks and luxury brands. The positive performance of companies like Morgan Stanley and LVMH is overshadowing other risks. For now, the market seems to be heading upwards, driven by this optimism in earnings.

Market Risks and Opportunities

There’s a noticeable gap between how stocks are performing and the underlying political risks, such as the ongoing government shutdown and US-China trade tensions. This market comfort is evident in the CBOE Volatility Index (VIX), which is trading below 15, a level that typically indicates low market fear. This situation is reminiscent of late 2017, when the markets rose despite growing risks. The shutdown is creating a unique environment where the lack of official economic data gives the Federal Reserve more reason to continue easing monetary policy. The market expects two more interest rate cuts before the year ends, likely during the November and December Federal Open Market Committee (FOMC) meetings. These expected cuts are boosting stock prices, making it tough to bet against the market in the short run. In the coming weeks, we might consider capitalizing on this bullish trend through short-term call options on the SPDR Dow Jones Industrial Average ETF (DIA). With the financial sector showing strength, buying call options on standout companies like Bank of America could also be a good strategy. Since the market’s current focus is narrow, aligning our tactics with the earnings narrative is key. However, it’s essential to prepare for a shift in sentiment when the government reopens and delayed economic data is released. Buying longer-dated, out-of-the-money puts on the DJIA for early 2026 could be a cost-effective way to protect against a potential sharp market downturn. This is a wise move if the upcoming data reveals economic weaknesses that the market seems to be ignoring. Reflecting on the 2018-2019 government shutdown, we saw the market react to ongoing uncertainty before recovering. While the overall trend remains upward, with both industrial and transport averages rising, we should pay close attention to trading volumes. A rally with declining volume could indicate that smart money is starting to exit positions. Create your live VT Markets account and start trading now.

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