In Monday’s regular trading session, the Dow Jones fell by 0.14%. In contrast, the S&P 500 and Nasdaq Composite rose by 0.36% and 0.71%, respectively. These gains were largely due to AI-related developments, especially AMD’s impressive 23.7% increase after announcing a multiyear deal with OpenAI.

Dow Jones Industrial Average

The Dow Jones Industrial Average includes 30 US stocks and is weighted by their prices. Its performance depends on company earnings, economic data, and interest rates set by the Federal Reserve. Dow Theory helps to identify stock market trends by comparing the DJIA with the DJ Transportation Average (DJTA). With US index futures declining, the current government shutdown seems to create short-term noise instead of altering the market’s direction fundamentally. The main factor remains the Federal Reserve, with markets mostly expecting rate cuts in October and December. This expectation of lower interest rates should help limit any major downturns soon. Historically, government shutdowns have led to short-term volatility but haven’t disrupted bull markets supported by a dovish central bank. For example, during the 35-day shutdown starting in December 2018, the S&P 500 actually rose over 10% as the Fed began to shift away from raising rates. We view the current situation similarly, where political drama takes a back seat to the potential for cheaper money. Recent weak labor market data backs the case for upcoming Fed rate cuts. The ADP report indicates only 95,000 new jobs, and JOLTS shows job openings dropping to 8.5 million. This economic softness, along with inflation reports showing core CPI at 2.8%, provides the Fed with clear space to ease its policies. Traders should look to use any dips related to the shutdown as opportunities to buy equity index futures and call options.

Divergence Between Dow and Nasdaq

The gap between the Dow and the Nasdaq underscores an important trend: the strength of the AI and tech sectors. A similar pattern occurred in 2023, where a few major tech stocks drove index performance despite broader economic concerns. Therefore, derivative strategies should lean toward the Nasdaq 100, possibly using call spreads on the QQQ ETF or focusing on individual standout stocks in the semiconductor sector. The delayed release of significant data, such as the Nonfarm Payrolls report, is likely to raise implied volatility, making options strategies more appealing. With the VIX index rising above 19 in recent sessions, selling premium with strategies like iron condors on broader indices could be profitable for those who think the market will stay within a range. However, the primary focus should be on preparing for a rally once a government funding agreement is reached or when the Fed officially indicates its next rate cut. Create your live VT Markets account and start trading now.

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