US shares fell again on Thursday, with the Dow Jones Industrial Average dropping below 46,000. The S&P 500 fell about 0.8% and moved below its 200-day moving average for the first time since May, while the Nasdaq Composite lost roughly 1%. Selling was broad, as the Russell 2000 neared correction territory after falling almost 10% from its 52-week high. The Dow is about 9% below its record above 50,500 and below its 200-day exponential moving average near 46,700.

Energy Shock Hits Markets

Brent crude rose above $118 a barrel before easing to about $112, and West Texas Intermediate climbed towards $97. The conflict has disrupted shipping through the Strait of Hormuz and removed about 20 million barrels per day from the export market, while European gas prices rose up to 35%. The Federal Reserve held rates at 3.50%–3.75% in an 11–1 vote. The dot plot still shows one 25 basis-point cut in 2026, but seven officials expect no cuts this year, and the 2026 core PCE forecast rose from 2.5% to 2.7%. CME FedWatch put the chance of even one cut by December at under 60%. Jobless claims fell by 8,000 to 205,000, continuing claims rose 10,000 to 1.857 million, and the Philadelphia Fed index increased to 18.1 from 16.3. Micron slid about 7% despite EPS of $12.20 on $23.86 billion revenue, up 196% year on year, and lifted 2026 capex by $5 billion. Boeing fell over 3%, Caterpillar dropped over 2%, and Salesforce rose more than 1.5%.

Volatility And Positioning

With the market reacting to a major energy shock and a hawkish Fed, we see volatility as the dominant factor for the weeks ahead. The CBOE Volatility Index (VIX) has surged past 32, a level we have not seen since the banking sector instability back in early 2025. This sustained high volatility means options premiums will remain expensive, making outright long positions costly and risky. The path of least resistance for major indices appears to be downward, especially with the S&P 500 now below its 200-day moving average. We believe selling into any strength is the prudent strategy, using futures contracts or bear call spreads to define risk. The Dow’s drop below 46,000 shows significant weakness, and any rally toward the broken 46,700 level should be seen as a shorting opportunity. A clear defensive rotation is underway, which presents opportunities for pair trades. We should consider long positions in the energy sector (XLE) to capitalize on crude prices that are nearing highs last seen in 2022. At the same time, we should look to short industrials (XLI) and consumer discretionary stocks, which are most vulnerable to rising input costs and weakening demand. The current economic environment is drawing strong comparisons to the stagflationary periods of the 1970s. Unlike the disinflationary environment we enjoyed through much of 2025, the Fed now has its hands tied, forced to keep rates high to fight inflation even as growth slows. This removes the “Fed put” that traders have relied on in previous downturns. Given the elevated premiums, buying puts outright is an expensive way to gain downside exposure. We favor using put debit spreads on indices like the SPDR S&P 500 ETF (SPY) to lower the entry cost. The demand for downside protection is intense, with the put-to-call ratio on major indices reaching its highest point this year, indicating that fear is the primary driver of market positioning. Create your live VT Markets account and start trading now.

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