US stocks have increased despite concerns about the ongoing US government shutdown. The S&P 500, Dow Jones Industrial Average, and Nasdaq 100 all recorded slight gains at the start of Tuesday’s session. The shutdown, now in its second week, has postponed important economic reports. This makes it harder for the Federal Reserve to evaluate the economic situation.

Rise of Artificial Intelligence

Despite political worries, excitement for Artificial Intelligence is still strong. A new deal between Advanced Micro Devices (AMD) and OpenAI, where AMD picks up a 10% stake, has caused AMD shares to jump over 23%. The shutdown has created uncertainty about the economy, which affects forecasts. The upcoming US jobs report complicates decisions for the Federal Reserve, which is expected to cut rates by 25 basis points in October. Gold prices have soared to nearly $4,000 per ounce, driven by a demand for safe assets and expectations of prolonged monetary easing. With the government shutdown continuing, we should examine market trends from the past. During the 35-day shutdown that started in late 2018, the CBOE Volatility Index (VIX) initially spiked over 30. Currently, the VIX is lower, around 19. This makes buying November VIX call options a cost-effective way to protect against a sudden market decline, safeguarding our portfolios if the recent calm—where the S&P 500 has risen for seven straight days—suddenly changes.

Analyzing Market Dynamics

The artificial intelligence sector remains a key market driver, similar to the momentum seen with semiconductor stocks from 2023 to 2024. The AMD and OpenAI deal adds fuel to this trend, suggesting that we consider bullish call spreads on the Technology Select Sector SPDR Fund (XLK) to tap into the sector’s strength. This strategy allows us to join in the AI surge while clearly outlining our maximum risk, which is wise given the current political instability. Markets are largely expecting a Federal Reserve rate cut in October, with the CME FedWatch Tool indicating over a 90% chance of a quarter-point reduction. However, the shutdown’s delay of key reports, like the nonfarm payrolls, leaves the Fed with incomplete information, making its decision less certain. We can trade this uncertainty by using straddles on the iShares 20+ Year Treasury Bond ETF (TLT), which would benefit from significant interest rate movements in either direction. Gold’s climb to about $4,000 per ounce reflects the demand for safe investments and expectations of looser monetary policy. This environment is very favorable for precious metals, making call options on the SPDR Gold Shares (GLD) an appealing way to maintain bullish exposure. Additionally, since rate cuts often weaken the dollar, we are looking at put options on the Invesco DB US Dollar Index Bullish Fund (UUP) as a related strategy. Create your live VT Markets account and start trading now.

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