On Wednesday, the Dow Jones Industrial Average (DJIA) reached new intraday highs above 48,000 but later dropped after Federal Reserve Chair Jerome Powell indicated that the recent interest rate cut might be the last for some time. The Fed implemented a 25 basis point interest rate decrease, expected by market participants, along with signaling plans to reduce Quantitative Easing balance sheet items.

Powell mentioned the challenge in forecasting economic outcomes due to the ongoing US government shutdown affecting employment and labour data. He acknowledged room for inflation growth due to tariff pressures but did not express substantial concerns about the labour market, stating there is no accelerated weakness in jobs.

Post Fed Announcement Reactions

Post-Fed announcement, rate market expectations for a December rate cut dropped from over 90% to 50%. Traders predict a 91% chance of a rate cut in January and 70% in March. The DJIA, a price-weighted index of 30 US stocks, is influenced by various factors, including Federal Reserve interest rates impacting credit costs.

Dow Theory, developed by Charles Dow, identifies market trends by comparing the DJIA with the Dow Jones Transportation Average. Trading the DJIA is possible through ETFs or futures contracts, which simplify engaging with the index.

We just saw the market touch a record high above 48,000 before reversing course on the Fed’s comments. The expected 25 basis point cut was overshadowed by the signal for a pause, creating significant uncertainty. The immediate spike in the CBOE Volatility Index (VIX) from a calm 14 to over 21 shows just how nervous traders have become overnight.

The main issue is the ongoing government shutdown, now entering its fourth week, which has delayed crucial data releases. Without the October jobs report, which we would normally expect next week, the Fed is essentially flying blind on the labor market. This forces them into the wait-and-see mode described, making any further policy moves highly dependent on data that we aren’t getting.

Strategies Amid Market Uncertainty

For experienced traders, this feels similar to the “mid-cycle adjustment” we saw back in 2019, when the Fed also cut rates but signaled it wasn’t the start of a long easing cycle. That period led to choppy, range-bound trading for several weeks as the market digested the new policy stance. We could be entering a similar phase of consolidation now that rate cut expectations for December have been halved.

With volatility now elevated, buying outright call or put options on the DJIA has become more expensive. Traders should consider using debit or credit spreads on DJIA-tracking ETFs to define their risk and lower their entry costs. For those anticipating a further slide as the shutdown drags on, buying put spreads could offer a cheaper way to gain downside protection.

Alternatively, if we believe this uncertainty is temporary and the market will settle, selling premium through strategies like iron condors could be viable. On the futures front, the focus will be on key technical levels, with the recent 48,000 peak now acting as significant resistance. Many will be watching to see if the index can hold the support established earlier in October around the 46,500 level.

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