European markets mostly gained, except for Germany’s DAX, which dropped by 0.37%. France’s CAC rose by 0.19%, the UK’s FTSE 100 increased by 0.23%, Spain’s Ibex went up by 0.14%, and Italy’s FTSE MIB grew by 0.68%. In the US, stocks performed steadily, with major indices in the green. The NASDAQ hit a record level earlier, and the S&P hovered near its record close of 6502.08 from September 4. The Dow Jones Industrial Average rose by 115 points or 0.25%, closing at 45630 points. The S&P index increased by 5.94 points or 0.09%, standing at 6501.14. The NASDAQ index climbed by 18.70 points or 0.08%, reaching 21817.

Small Cap Divergence

However, the small-cap Russell 2000 declined by 19.61 points or 0.82%, settling at 2375.28. With the S&P 500 close to its all-time high of 6502, the significant drop in the small-cap Russell 2000 raises concerns. This split often indicates economic weaknesses that affect smaller companies more than the largest ones. As a result, we suggest considering VIX call options for volatility, as this divergence can often lead to broader market downturns. Given the situation, buying protective puts on the S&P 500 index seems like a smart move in the coming weeks. September is usually the weakest month for the stock market, and the latest August 2025 US CPI report showed slightly higher inflation at 3.1%. This increases the chance of a hawkish surprise from the Federal Reserve, making short-term downside protection appealing. The Russell 2000’s underperformance suggests a profitable pair trade. We’re looking at going long on NASDAQ 100 futures (NQ) while shorting Russell 2000 futures (RTY). Higher interest rates typically hurt smaller, more indebted companies, which explains the pressure on the Russell index.

European Market Dynamics

In Europe, the weakness of the German DAX stands out amid gains in other markets. Recent data from German manufacturing PMI showed a contraction for the second month in a row, dropping to 49.2 and raising recession fears. However, we see this as a localized issue rather than a continent-wide concern for now. This divergence in Europe makes a relative value trade appealing. We are considering long positions in Italy’s FTSE MIB, which has shown strong momentum, against short positions in the German DAX. This can be executed using options on country-specific ETFs to separate Germany’s economic slowdown from the overall positive sentiment in Europe. This market behavior reminds us of late 2021, just before the major downturn in 2022. During that period, major tech stocks held their highs while the wider market began to weaken. We view that time as a critical historical reference for our strategy over the next month. Create your live VT Markets account and start trading now.

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