The S&P 500 remained in a range recently, with bullish momentum slowing but supported by a lack of bearish influences. US inflation data showed some tariff passthrough but was below expectations, providing support for the market.
A brief dip occurred after news of Trump potentially firing Fed Chair Powell, but this reversed as Trump stated it was unlikely. Economic data such as Retail Sales, Jobless Claims, and the Philly Fed index exceeded forecasts, indicating a healthy economic pace.
Fed Interest Rate Expectations
The Fed is expected to either hold or cut rates, potentially leading the market to continue climbing. Short-term risks may arise from hawkish interest rate repricing or escalations in tariffs without delays.
On the 1-hour chart, the news of Trump potentially firing Powell caused a dip, but support held as the situation remained speculative. Following strong US data, buyers increased bullish bets, leading to a breakout. If a pullback occurs, buyers may re-enter around the previous resistance of 6,333, while sellers may target a deeper pullback towards 6,246 if prices fall below this level.
Given the market’s upward break, we believe derivative traders should favor strategies like buying call options or implementing bullish call spreads. The CBOE Volatility Index, or VIX, has been trading near 12, a multi-year low, which makes the cost of establishing these upside positions relatively cheap. This allows for participating in the rally while clearly defining risk.
Our view is reinforced by the high probability of a Fed interest rate cut later this year, with the CME FedWatch tool currently showing a greater than 60% chance of a cut by the September meeting. This policy outlook, along with data showing the economy is growing without runaway inflation, provides a strong tailwind for equities. The political drama surrounding individuals like Trump and the central bank has consistently been a short-lived distraction.
Market Trajectory and Risks
Historically, this setup is reminiscent of 2019, when a policy pivot from Powell toward easing ignited a major market rally even as economic data was merely stable. So long as a severe recession remains off the table, the market’s path of least resistance appears to be higher. We see the recent S&P 500 performance, up over 14% year-to-date, as evidence of this momentum.
To manage the short-term risks mentioned, traders can consider buying cheap, out-of-the-money put options as a hedge. This provides a form of insurance against an unexpected hawkish shift or a sudden trade war escalation. A sharp break below the 6,246 support level would be a signal that such risks are materializing.
On a tactical basis, we see any pullback to the 6,333 breakout zone as a buying opportunity. Selling cash-secured puts at this level or slightly below could be an effective strategy. It allows a trader to either collect premium as the market finds support or to get long the market at that more attractive entry point.
