The Dow Jones Industrial Average (DJIA) ends the week near its starting point around the 47,500 mark. Despite the Federal Reserve’s interest rate cut and a new high above 48,000, the market remains generally unimpressed.

Tech giants report strong earnings due to rising demand for AI-related technologies. Amazon’s cloud unit saw a 20% revenue increase, boosting market indexes, while Meta Platforms faced financial strain due to high expenses in AI investment with little revenue return.

Cooler Trade Tensions

Trade tensions between the US and China seem to be cooling, with unofficial discussions indicating a temporary agreement to reduce protectionist threats. Despite US intentions to delay new tariffs, China has not yet followed through on trade promises.

The DJIA comprises 30 highly traded US stocks, price-weighted and not representative of the broader market. The index’s performance is driven by company earnings, economic data, and interest rates. Dow Theory, created by Charles Dow, tracks market trends using the DJIA and other indices.

Trading the DJIA can involve ETFs like SPDR Dow Jones Industrial Average ETF, futures contracts, options, and mutual funds. These allow diverse methods of engaging with the index’s market potential.

With the Dow Jones struggling for direction around 47,500, we see limited conviction for a major breakout. The Federal Reserve’s cautious tone on future rate cuts removes a key bullish catalyst, making aggressive upside bets through call options on the SPDR Dow Jones Industrial Average ETF (DIA) seem poorly timed. This indecisive market suggests that selling premium through strategies like covered calls on existing holdings could be a prudent way to generate income.

Trade Risks and Market Strategies

The fragile trade truce with China presents a significant risk that derivative markets may be underpricing. We can look back to the 2018-2019 period, when similar verbal agreements under the first Trump administration often unraveled, causing the CBOE Volatility Index (VIX) to spike above 30 on several occasions. Buying VIX call options or longer-dated puts on the index could serve as a cheap and effective hedge against a sudden return of trade war headlines.

A clear divergence is emerging in the tech sector between AI infrastructure providers and AI application developers. Amazon’s cloud strength shows where the money is currently being made, while Meta’s ballooning expenses highlight the unprofitability of the consumer-facing AI race. This suggests a pairs trading opportunity, using call options on cloud computing and semiconductor ETFs while simultaneously buying put options on companies with heavy AI spending and no clear path to revenue.

This trend is not new; we have seen it develop over the past few years. Looking back, Meta’s Reality Labs division had already accumulated operating losses of over $50 billion by the end of 2024, a pattern of spending that continues today. In contrast, Amazon Web Services’ operating income grew by over 15% year-over-year in the same period, confirming that selling the tools for the AI gold rush has been far more profitable than digging for the gold itself.

Given the Dow’s failure to sustain momentum above the new high of 48,000, we view this level as strong resistance. A range-bound strategy like an iron condor on the DIA, selling a call spread above 48,000 and a put spread below recent support, could be effective. This position profits from the index remaining contained as the market digests the mixed signals from the Fed, corporate earnings, and geopolitical tensions.

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