Insights 
VT 
US stocks opened higher amid optimism in the AI sector, with the S&P 500 up 0.20%, the Dow Jones Industrial Average gaining 0.45%, and the Nasdaq 100 adding 0.17%. Investors are anticipating consumer sentiment data while monitoring developments in AI.
The ongoing US government shutdown, now in its tenth day, has delayed important economic reports, affecting economic assessment and Federal Reserve policy expectations. The Fed had previously cut rates by 25 basis points in September, indicating possible future reductions, but the budget stalemate increases uncertainty around these decisions.
Insights Into Consumer Confidence
Markets are turning to sources like the University of Michigan survey for insights into consumer confidence and inflation expectations. These findings could be crucial without fresh economic data from the government.
AI continues to boost market sentiment, with tech stocks benefiting from strong earnings, notably from Nvidia, which recently hit an all-time high. Despite this, there is caution due to political gridlock and data gaps contributing to market volatility.
Focus is also on the upcoming third-quarter earnings season, with major banks such as JPMorgan and Citigroup set to report results next week, adding to the market’s anticipation.
Given the government shutdown and the lack of official economic data, we should anticipate higher market volatility in the coming weeks. This suggests buying options on volatility indices like the VIX or using straddles on the S&P 500 to profit from a significant price swing in either direction. Looking back at the 2018-2019 shutdown, we saw the VIX spike nearly 80% during that period of uncertainty, providing a clear historical precedent for this strategy.
Maintaining Bullish Exposure in AI
Despite the broader caution, the AI sector continues to be a pocket of strength, and we should look for ways to maintain bullish exposure there. With Nvidia reaching new highs, we can use call options to capture further gains or implement bull call spreads to limit our initial cost. The incredible growth we witnessed just a few years ago, when the AI chip market surged by over 38% annually, demonstrates the powerful, long-term trend supporting these trades.
As third-quarter earnings season begins next week with the major banks, we should prepare for significant single-stock price moves. For JPMorgan, we can use a long straddle, a strategy that profits if the stock moves more than expected, regardless of direction. The options market is currently pricing in a potential 4% move for the stock following its report, which gives us a clear hurdle for the trade to be profitable.
The delay in official inflation and employment reports makes the Federal Reserve’s next move highly uncertain, turning today’s University of Michigan consumer survey into a crucial data point. Any surprising inflation expectation numbers from that report could cause a sharp, immediate reaction in interest rate futures. We saw a similar dynamic in late 2023 when alternative data moved markets significantly while traders awaited clear signals from the Fed.
