The S&P 500 has been stable lately, with positive momentum slowing but still lacking any major negative factors. Recent US inflation data showed some effects from tariffs but was lower than expected, which helped support the market. There was a brief drop after the news that Trump might fire Fed Chair Powell, but this change reversed when Trump said it was unlikely. Economic data on Retail Sales, Jobless Claims, and the Philly Fed index was better than expected, pointing to a healthy economy.

Fed Interest Rate Expectations

The Fed might either keep interest rates steady or cut them, which could help the market rise further. There may be short-term risks, such as a sudden increase in interest rates or higher tariffs without notice. On the 1-hour chart, the news about Trump and Powell caused a dip, but support levels held as the situation was still uncertain. After strong US data, buyers became more optimistic, leading to a breakout. If there is a pullback, buyers might re-enter around the previous resistance level of 6,333. However, sellers may aim for a deeper pullback to 6,246 if prices drop below that. Since the market is showing an upward trend, we suggest that derivative traders focus on strategies like buying call options or setting up bullish call spreads. The CBOE Volatility Index (VIX) is near 12, its lowest in years, making it cheaper to establish these upside positions. This offers an opportunity to join the rally with manageable risk. We also believe there is a strong chance of a Fed interest rate cut later this year, with the CME FedWatch tool indicating over a 60% likelihood of this happening by the September meeting. This outlook, along with stable economic growth and controlled inflation, is a solid boost for stocks. The political drama with figures like Trump and the central bank has often been a temporary distraction.

Market Trajectory and Risks

Historically, this situation is similar to 2019 when Powell’s shift toward easing sparked a big market rally, even though the economic data was stable. As long as a severe recession remains unlikely, the market’s most favorable direction seems to be upward. The S&P 500’s performance, which has risen over 14% so far this year, supports this view. To address the short-term risks discussed, traders might consider buying low-cost out-of-the-money put options as insurance against an unexpected shift towards higher interest rates or a sudden trade conflict. A sharp decline below the 6,246 support level would signal that these risks are becoming real. On a tactical level, we see any pullback to the 6,333 breakout zone as a good buying opportunity. Selling cash-secured puts at this level or slightly lower could be an effective strategy, allowing traders to earn premium as the market stabilizes or to enter at a more favorable price. Create your live VT Markets account and start trading now.

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