The Dow Jones Industrial Average (DJIA) finished the week close to where it began at around 47,500. Even with the Federal Reserve cutting interest rates and the index briefly hitting over 48,000, the market overall seems unimpressed. Big tech companies are reporting strong earnings thanks to increased demand for AI technology. Amazon’s cloud service saw a 20% rise in revenue, lifting market indexes. In contrast, Meta Platforms is facing financial challenges because of high costs in AI investments with little return.

Cooler Trade Tensions

Trade tensions between the US and China appear to be easing. Unofficial talks suggest a temporary agreement to lower protectionist measures. While the US plans to delay new tariffs, China has yet to fulfill its trade commitments. The DJIA includes 30 highly traded US stocks. It’s price-weighted, and doesn’t represent the entire market. The index’s performance depends on company earnings, economic data, and interest rates. Dow Theory, founded by Charles Dow, analyzes market trends using the DJIA and other indices. Trading the DJIA can be done through ETFs like the SPDR Dow Jones Industrial Average ETF, futures contracts, options, and mutual funds. These provide various ways to connect with the index’s market potential. With the Dow hovering around 47,500, there is limited enthusiasm for a big breakout. The Federal Reserve’s cautious stance on future rate cuts takes away a key boost for the market. This makes aggressive bets through call options on the SPDR Dow Jones Industrial Average ETF (DIA) seem poorly timed. In this uncertain market, selling premium through strategies like covered calls on current holdings could be a smart way to earn income.

Trade Risks and Market Strategies

The delicate trade truce with China poses a significant risk that the derivative markets are not fully accounting for. Looking back to 2018-2019, similar verbal agreements during the first Trump administration often fell apart, causing the CBOE Volatility Index (VIX) to spike above 30 multiple times. Buying VIX call options or longer-dated puts could be an affordable and effective hedge against a sudden resurgence of trade war news. A clear split is emerging in the tech sector between providers of AI infrastructure and those developing AI applications. Amazon’s strength in cloud services highlights where profits are being made, while Meta’s rising costs point to challenges in the consumer-facing AI space. This presents a trading opportunity: consider using call options on cloud computing and semiconductor ETFs while simultaneously buying put options on companies spending heavily on AI without clear revenue paths. This trend has been ongoing for some time. By the end of 2024, Meta’s Reality Labs division had already accumulated over $50 billion in operating losses, a trend that continues. In comparison, Amazon Web Services’ operating income grew by more than 15% year-over-year, proving that selling the tools for the AI boom is more profitable than chasing the AI gold itself. Given the Dow’s struggle to maintain momentum above 48,000, we see this level as significant resistance. A range-bound strategy, such as an iron condor on the DIA, selling a call spread above 48,000 and a put spread below recent support, could be effective. This approach profits if the index remains stable as the market processes mixed signals from the Fed, corporate earnings, and global tensions. Create your live VT Markets account and start trading now.

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