Insights 
VT 
European markets mostly saw gains, with the exception of Germany’s DAX, which fell by 0.37%. France’s CAC rose by 0.19%, the UK’s FTSE 100 increased by 0.23%, Spain’s Ibex went up by 0.14%, and Italy’s FTSE MIB grew by 0.68%.
In the US, stock performance was steady, with major indices in positive territory. The NASDAQ reached a record level previously, and the S&P traded near its record close of 6502.08 from September 4. The Dow Jones Industrial Average increased by 115 points or 0.25%, closing at 45630 points. The S&P index went up by 5.94 points or 0.09%, marking a level of 6501.14. The NASDAQ index rose by 18.70 points or 0.08%, reaching 21817.
Small Cap Divergence
Meanwhile, the small-cap Russell 2000 remained down by 19.61 points or 0.82%, settling at 2375.28.
With the S&P 500 trading near its all-time high of 6502, we see a concerning divergence as the small-cap Russell 2000 is down sharply. This split often signals underlying economic weakness not yet reflected in the largest companies. We should therefore consider buying volatility through VIX call options, as this divergence frequently precedes broader market turbulence.
Given this setup, we believe buying protective puts on the S&P 500 index is a prudent strategy for the coming weeks. September has historically been the stock market’s weakest month, and with the latest August 2025 US CPI report coming in slightly above expectations at 3.1%, the risk of a hawkish surprise from the Federal Reserve is elevated. This makes near-term downside protection relatively attractive.
The clear underperformance of the Russell 2000 suggests a pair trade could be profitable. We are looking at strategies that go long NASDAQ 100 futures (NQ) while simultaneously shorting Russell 2000 futures (RTY). Higher interest rates disproportionately harm smaller, more indebted companies, which explains the pressure on the Russell index.
European Market Dynamics
Turning to Europe, the weakness in the German DAX stands out against the modest gains elsewhere. Recent German manufacturing PMI data from last week showed a contraction for the second straight month, falling to 49.2 and fueling recession fears. We see this as a specific, localized issue rather than a continent-wide problem for now.
This European divergence makes a relative value trade compelling. We are exploring long positions in Italy’s FTSE MIB, which showed strong positive momentum, against short positions in the German DAX. This can be implemented using options on their respective country-specific ETFs to isolate Germany’s economic drag from broader European sentiment.
This kind of market action reminds us of the conditions we saw in late 2021, right before the major market downturn of 2022. During that period, mega-cap tech stocks also held up near their highs while the broader market was beginning to show cracks underneath. We are treating that period as a key historical guide for our positioning over the next month.
