US stocks rebounded after Trump ruled out military action on Greenland, alleviating a key market concern. Trump, speaking at Davos, assured not to use excessive force, calming fears that had led to a sharp sell-off. Stocks rose, with Treasury yields falling and the dollar stabilising after earlier weakness.
The Dow Jones Industrial Average increased by about 160 points (0.33 percent), while the S&P 500 gained 0.25 percent, and the Nasdaq Composite advanced 0.1 percent. Despite early gains, stocks retreated as tariff risks between the US and Europe lingered. Trump’s statement on Greenland negotiations kept geopolitical uncertainties prevalent.
Sector Performance
Sector performance showed selective relief, not broad risk-on moves. Bank stocks did well after Trump mentioned a 10 percent credit card interest rate cap, with major lenders seeing modest gains. Bond prices rose following Trump’s remarks, easing Tuesday’s market turmoil. The earlier session had been the worst for US equities since October.
European lawmakers halted approval of the July EU-US trade deal due to Trump’s proposed tariffs on European goods linked to Greenland. Supreme Court justices questioned Trump’s authority to dismiss Federal Reserve Governor Lisa Cook, emphasising Fed independence. The Dow Jones Industrial Average includes 30 US-traded stocks and is price-weighted rather than by capitalization. Trading options include ETFs, futures contracts, and mutual funds offering exposure to the index.
With the immediate threat of military action off the table, we are seeing a partial collapse in market volatility. The VIX index, which measures implied volatility, likely surged above 30 in the prior session but has now settled back into the low 20s. This level still suggests significant trader anxiety compared to the calmer conditions we experienced at the end of 2025.
For derivative traders, this is not a signal to get aggressively bullish, but rather to hedge against the remaining, well-defined risks. We should consider buying put options on broad market indices to protect against downside from the ongoing US-Europe tariff negotiations. Using longer-dated options expiring in March or April would give us protection through this period of heightened geopolitical uncertainty.
The Suspension of the Trade Deal
The suspension of the EU-US trade deal directly threatens American companies with high European sales, particularly in the technology and consumer discretionary sectors. We are seeing increased interest in buying puts on specific large-cap stocks that derive more than 25% of their revenue from Europe. This is a targeted way to isolate risk away from the broader market rebound.
The Supreme Court’s focus on Federal Reserve independence introduces a new variable for interest rate derivatives. This political pressure comes just as we digest the December 2025 inflation report, which showed core CPI still holding above 3%. Any perceived threat to the Fed’s authority could cause sharp, unexpected moves in Treasury futures, making straddles a viable strategy to play the potential for increased rate volatility.
Given that the market faded from its highs, we can use options to define our risk on any new positions. Selling credit spreads, such as a bear call spread on the S&P 500, allows us to collect premium while betting that the market’s upside will remain capped by the unresolved trade issues. This strategy benefits from both a sideways market and the still-elevated option premiums.
From a Dow Theory perspective, we are watching the Dow Jones Transportation Average closely for confirmation of this rebound. The transports have been lagging the industrials, which historically suggests underlying economic weakness and serves as a non-confirmation of the primary trend. Until both indices move higher in unison, we should remain cautious and avoid establishing large, unhedged long positions.
