U.S. equities experienced mixed performance as concerns about inflation balanced hopes for peace and a possible rate cut. The Dow Jones managed to avoid a drop, primarily due to UnitedHealth Group’s rise of 11.98%, influenced by Berkshire Hathaway’s recent purchase of its shares.
During the session, the Dow hit a record high of 45,203.52, driven by enthusiasm from UnitedHealth’s news. However, gains diminished as profit-taking occurred, and the index settled at 44,946.12, below its record closing high from earlier in the week.
Mixed Market Performance
The overall market showed varied results. The S&P 500 and Nasdaq Composite had mixed outcomes, with tech sectors facing resistance, while some cyclical sectors remained steady. Without UnitedHealth’s surge, the Dow might have ended lower like other benchmarks.
Closing levels were as follows: the Dow rose 34.86 points or 0.08% to 44,946.18, the S&P fell 18.74 points or 0.29% to 6,449.80, and the NASDAQ decreased 87.69 points or 0.43% to 21,622.98. The Russell 2000 small-cap index dropped 12.55 points or 0.55% to 2,286.52.
For the week, the Dow rose by 1.74%, outperforming the S&P 500’s 0.94% and the NASDAQ’s 0.81% increases.
We are seeing a market struggling between hopes for a Federal Reserve rate cut and renewed concerns about inflation. The Dow Jones hit a new record this week but failed to hold it, showing that conviction is weak at these levels. The latest Import Price Index reading, which jumped 1.2% month-over-month, is a significant worry and the sharpest increase we have seen since the inflation spikes back in 2022.
Market Strategies and Sector Performance
This uncertainty suggests volatility may be undervalued, making it a key area to watch in the coming weeks. The CBOE Volatility Index (VIX) has crept up to 17.5, after trading below 15 for most of July, indicating a rise in trader anxiety. This environment could make long straddles or strangles on broad indices like the S&P 500 attractive, as they profit from a significant price move in either direction.
The narrowness of the market rally is also a major red flag, as the Dow was only positive because of a single stock. Market breadth has been weakening, with the advance-decline line for the NYSE failing to confirm the Dow’s new highs. For traders with existing long positions, this is a textbook moment to consider hedging by purchasing protective puts on the SPY ETF.
A clear rotation appears to be underway, with strength in healthcare and weakness in technology and small-cap stocks. While Fed funds futures are pricing in a 65% chance of a rate cut at the September meeting, the market’s current momentum is favoring defensive sectors. This divergence could be played by using call options on the healthcare sector ETF (XLV) while considering put options on the Nasdaq 100 ETF (QQQ).
