The DJIA hovered near 52,000 on Monday, down about 100 points, while the S&P 500 rose 0.4% and the NASDAQ Composite gained 0.9%, with all three indices coming off a losing week. Trading unfolded on the ninth straight day of US strikes on Iran, yet risk appetite improved after Iran’s Foreign Ministry said intermediaries were still exchanging messages and talks could proceed where national interests allow. In energy, US pump prices moved back above $4.00 a gallon even as WTI held around $82.00 and Brent traded near $88.00, despite continued threats to shipping around the Strait of Hormuz and a Houthi-declared maritime embargo against Saudi Arabia targeting the Bab el-Mandeb chokepoint.
US equities’ outperformance was led by semiconductors: Micron rose more than 3%, Advanced Micro Devices added more than 2%, Teradyne climbed better than 5%, and Astera Labs gained over 4%, while the sector’s benchmark fund advanced more than 1% after a third weekly decline in four. Outside the US, South Korea’s KOSPI fell 4.5% as chip-linked names sold off. In rates, fed funds futures priced an 83% chance of a hold on July 29, then a 76% probability of a first hike by September, near certainty by late October, and a 41% chance of a second move by December into a 4.00%–4.25% target range, with no cuts priced. The data diary includes ADP’s four-week average at 19.75K (12:15 GMT Tuesday), initial claims seen at 212K after 208K (12:30 GMT Thursday), and Friday’s PMIs—manufacturing 54.5 after 53.9 and services 51 after 51.2—followed by June new home sales after a 7.3% MoM fall (14:00 GMT). Technically, resistance sits at 52,400, then 52,700–52,800 and a record near 53,300; support is 51,900, with the 50-day EMA near 51,400 and another level around 51,200.
Disconnect Between Equities and Rates Presents Opportunities
We are seeing a major disconnect between the stock market and the interest rate market that derivative traders must exploit in the coming weeks. While stock investors are pushing tech shares higher on hopes of Middle East diplomacy, bond traders are pricing in higher interest rates due to rising inflation. Historically, when these two markets disagree so sharply, the bond market is usually right, meaning a sharp stock market correction could be just around the corner.
We must look closely at the supply chain pressures, with U.S. average gas prices climbing past $4.00 a gallon and Brent crude hovering around $88.00. Global freight costs are also feeling the pinch; for example, the Drewry World Container Index recently surged toward $5,000 per 40ft container due to rising shipping risks in the Red Sea. These mounting costs mean the inflation threat is very real, which will likely force the Federal Reserve to keep interest rates higher for longer.
The upcoming Federal Reserve meeting on July 29 is the ultimate catalyst where this market contradiction will be settled. Fed funds futures currently show an 83% chance of a pause this month, but they also price in a 76% chance of a rate hike by September. We recommend that derivative traders position for a volatility spike ahead of this decision by using long straddles on the S&P 500 or Nasdaq.
Technical and Sector-Level Trading Strategies
For those focusing on the Dow Jones, which sits near 52,000 and lacks the semiconductor cushion of other indexes, the technical outlook is heavily tilted to the downside. The index has been printing lower highs, and a break below the 51,900 support level could quickly push it down to its 50-day moving average near 51,400. To capitalize on this, we favor buying out-of-the-money put options on the DJIA to hedge against a hawkish surprise from the Fed.
We also suggest caution in the semiconductor space, despite the recent bounce driven by Microsoft’s new hardware deals. While chip stocks have rallied, analysts at Wells Fargo have warned that the sector is still due for a deeper reality check. This is supported by global tech sell-offs, such as South Korea’s KOSPI index recently dropping 4.5% on heavy losses from key chipmakers like Samsung.
