The Dow Jones Industrial Average had a bumpy ride on Friday. It started off strong due to better consumer sentiment and inflation data. The University of Michigan’s report showed that the Consumer Sentiment Index rose to 61.8. Inflation expectations also dropped, with one-year expectations down to 4.4% and five-year forecasts to 3.6%. However, despite some companies posting good earnings, the Dow took a hit. Both 3M and American Express fell by over 3% after reporting their results. Concerns about 3M’s legal costs and challenges for American Express weighed on investors.

The Dow’s Bearish Turn

On Friday, the Dow closed near its opening levels for the week, raising fears of a bearish trend. The index had trouble staying around the 44,500 level because it lacked strong upward momentum. The Federal Reserve plays a big role in shaping US monetary policy to stabilize prices and aim for full employment. They adjust interest rates to manage inflation and economic growth. During crises, the Fed may use Quantitative Easing or Tightening to tweak the financial system, which can affect the US Dollar’s strength. Federal Open Market Committee meetings, held eight times a year, discuss these monetary policy decisions. Various Fed officials are involved, and these policies greatly influence the economy and currency value.

Market Sentiments And Strategies

We see signs of weakness in the market, even with some positive economic data. The drop in key companies like 3M and American Express—despite one beating earnings forecasts—signals that specific company issues are shaking investor confidence. This suggests that struggling to maintain important levels, such as the 38,000 mark for the Dow, is a warning for bullish investors. Given this uncertainty, we recommend traders consider buying downside protection. The latest University of Michigan survey for May 2024 showed consumer sentiment fell sharply to 67.4, the lowest in six months. This contradicts earlier optimism and may hint at slowing economic growth. The CBOE Volatility Index (VIX) has been low, around 13, making it cost-effective to purchase put options on broad market ETFs to protect long portfolios against a downturn. The Federal Reserve remains a key influence, and we expect volatility surrounding their announcements. The CME FedWatch Tool indicates more than a 99% chance that rates will stay the same at the June meeting, while the likelihood of a rate cut in September is around 50%. This situation creates a high-alert environment where unexpected inflation data or hawkish remarks could lead to significant market swings. To take advantage of this, we are looking at options strategies that benefit from big price movements in either direction. Setting up long straddles or strangles on indices before the next Consumer Price Index (CPI) release or FOMC press conference may be wise. Historically, these times show increased volatility, which these strategies aim to capture. Create your live VT Markets account and start trading now.

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