Insights 
VT 
US stocks have risen despite concerns about the ongoing US government shutdown. The S&P 500, Dow Jones Industrial Average, and Nasdaq 100 showed slight gains at the start of Tuesday’s trading session.
The shutdown, now in its second week, has delayed key economic reports. This complicates the Federal Reserve’s ability to assess the economic outlook.
Rise of Artificial Intelligence
Amid political concerns, enthusiasm for Artificial Intelligence remains high. A deal between Advanced Micro Devices (AMD) and OpenAI, where AMD gains a 10% stake, propelled AMD shares up by over 23%.
The macroeconomic environment remains unclear due to the shutdown, affecting economic forecasts. The pending US jobs report complicates Federal Reserve decisions, with a 25-basis-point rate cut expected in October.
Gold prices have surged to nearly $4,000 per ounce. This is driven by demand for safe assets and expectations of extended monetary easing.
The ongoing government shutdown is creating uncertainty, and we should look at how markets have behaved in the past. During the 35-day shutdown that began in late 2018, the CBOE Volatility Index (VIX) initially surged above 30, so with the VIX currently sitting lower, near 19, buying November VIX call options offers a cost-effective way to hedge against a sudden market downturn. This allows us to protect our portfolios if the current market calm, which has seen seven straight up days for the S&P 500, suddenly breaks.
Analyzing Market Dynamics
The artificial intelligence story continues to be the market’s primary driver, much like the momentum we saw with semiconductor stocks back in 2023 and 2024. The AMD and OpenAI deal is fueling this fire, so we should consider bullish call spreads on the Technology Select Sector SPDR Fund (XLK) to gain exposure to the broader sector’s strength. This strategy lets us participate in the AI rally while clearly defining our maximum risk, which is prudent given the political uncertainty.
Markets are overwhelmingly expecting a Federal Reserve rate cut in October, with the CME FedWatch Tool showing a probability of over 90% for a quarter-point reduction. However, with the shutdown delaying key reports like the nonfarm payrolls, the Fed is flying partially blind, which makes its decision less of a sure thing. We can trade this uncertainty by using straddles on the iShares 20+ Year Treasury Bond ETF (TLT), which would profit from a significant move in interest rates regardless of the direction.
Gold’s surge to a new all-time high near $4,000 per ounce is a direct response to the demand for safe havens and the expectation of easier monetary policy. This environment is highly supportive for precious metals, making call options on the SPDR Gold Shares (GLD) an attractive way to maintain bullish exposure. At the same time, because rate cuts tend to weaken the dollar, we are looking at put options on the Invesco DB US Dollar Index Bullish Fund (UUP) as a related trade.
