Last week, we put on a very small straddle position in QQQ: we simultaneously bought a September 25 call and put, both with a strike price of 704. The two legs cost $9.73 and $8.93, respectively.
A few trading days later, the call has risen to $37.74, generating an unrealized gain of $2,800, while the put has fallen to just $0.26, producing a loss of $867. Netting the two together, this lightly sized position has already doubled.
$纳指100ETF(QQQ)$ $纳斯达克(.IXIC)$ $NQ100指数主连 2609(NQmain)$ $微型NQ100指数主连 2609(MNQmain)$ $标普500ETF(SPY)$ $标普500(.SPX)$ $SP500指数主连 2609(ESmain)$ $微型SP500指数主连 2609(MESmain)$ $标普500波动率指数(VIX)$ $道琼斯指数主连 2609(YMmain)$ $微型道琼斯指数主连 2609(MYMmain)$ $道琼斯(.DJI)$
The fact that it doubled is not, by itself, remarkable. What is remarkable is how it doubled: a sharp upward thrust pushed the call’s price to nearly four times its original cost. S&P futures broke decisively above the daily-chart resistance line that had capped them for some time, cleared the prior-high resistance level, and printed fresh highs. From a price-action perspective, it was a textbook breakout.
But it is precisely at moments like this that I want to put my conclusion on the table first: I believe U.S. equities are currently in the final leg of a rebound before the next downswing begins.
How much further this rebound can run will largely depend on shifts in risk appetite, which are inherently emotional and difficult to assess. There may be another 2% of upside before a topping structure forms and the market turns lower. Alternatively, equities could accelerate again after breaking above the previous high, aided by supportive developments such as declining oil prices, falling yields, and a renewed round of high-level diplomacy between China and the United States. That could produce a medium-term advance before another decline begins at some point in October.
But regardless of which path the market takes, my directional view does not change. The reason is simple: the market has performed essentially the same script three times over the past two decades.
I. The Old Script: Three Hiking Cycles, the Same Opening Act
If we lay out the three complete Federal Reserve tightening cycles—from June 30, 2004 to June 29, 2006; from December 16, 2015 to December 19, 2018; and from March 16, 2022 to July 26, 2023—the S&P 500’s price action shared almost the same opening sequence.
When the first rate hike arrives, the market does not necessarily reverse immediately. On the contrary, it often gives bulls a respectable amount of additional time.
In 2004, the S&P 500 consolidated for several more weeks near the 1,140 level.
$纳指100ETF(QQQ)$$标普500ETF(SPY)$ $标普500(.SPX)$ $SP500指数主连 2609(ESmain)$ $微型SP500指数主连 2609(MESmain)$ $标普500波动率指数(VIX)$
In December 2015, the index first moved above 2,080 before it began to weaken.
December 16, 2015 to December 19, 2018: After an initial decline, the S&P 500 entered an upward trend.
The March 2022 episode was even more extreme. Following the first rate hike, the market staged a sharp rebound, lifting the index from around 4,200 back to 4,600 in one powerful move.
In other words, the market can still make new highs after the first rate hike.
Then the script turns the page. In all three cases, a meaningful selloff followed within one to three months of the first hike.
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In 2004, the S&P 500 fell from around 1,145 to roughly 1,060.
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In 2015, it dropped from 2,080 to 1,810—a decline of 13% in two months.
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The 2022 episode was the most severe: the index fell from 4,600 to 3,500, a decline of more than 20%.
The conspicuous red boxes in the three charts mark this “post-first-hike decline.”
Only after that came the part long-term investors know well: the market stabilized at lower levels, rebounded, and then followed a clear rising channel into a medium- to long-term advance lasting one to three years.
After bottoming in August 2004, the S&P 500 rose above 1,400 by 2006. After bottoming in February 2016, it climbed all the way to 2,900 by 2018. After bottoming in October 2022, it returned to 4,800 by the end of 2023.
Over the same periods, the federal funds rate rose from 1% to 5.25%, from 0.1% to 2.4%, and from 0.25% to 5.33%, respectively. Rate hikes continued, and equities continued higher—but not before paying a “toll.”
First a push to new highs, then a sharp selloff, then stabilization, and finally a prolonged bull market: that is the standard four-stage pattern following the first rate hike.
II. But This Time, the Second Half Is Questionable
If the historical pattern were all that mattered, the current playbook would be simple: wait for the decline to finish, then buy.
The problem is that the three historical episodes above shared the same macro backdrop. They all occurred as economies emerged from recession, moved into recovery, and then transitioned toward expansion. Interest rates were rising step by step from exceptionally low levels, and rate hikes themselves served as confirmation that the economy was improving.
This time is different.
The starting point of this cycle was the aggressive easing that followed the 2020 pandemic shock, followed by a prolonged period of ultra-low interest rates and extraordinarily loose liquidity. That liquidity eventually drove inflation out of control, forcing policymakers to begin tightening.
From the standpoint of the economic cycle, we are nowhere near the transition from recovery to prosperity. What we are seeing now looks more like the late stage of an AI bubble. And in absolute terms, interest rates are not especially low today.
That is why my base case is that the “decline first” phase remains highly probable. At a minimum, I believe U.S. equities will experience another major selloff before the November election, and the market is unlikely to avoid it. The question is whether the “recovery afterward” can unfold with the same historical momentum. That deserves a very large question mark.
The answer to that question rests on AI. In the second half of this year and into early 2027, the real output of the AI value chain and the actual earnings delivered by AI-related companies will carry enormous historical significance.
Can they meet the earnings expectations already priced into the market? Can they exceed those expectations and continue lifting equity indices? These questions remain unresolved.
As long as the AI bubble has not burst and overall AI capacity has not peaked, I believe U.S. equities still have the potential to move higher. But the precondition is that the market first needs a meaningful correction in the near term.
III. Who Is Buying at These New Highs? Retail’s “Magnificent Seven” Versus Absent Institutions
So who, exactly, is buying this breakout?
Let us start with institutions. This week, institutional bullish positioning in U.S. equities remained weak, much as it was last week. Aggregate institutional market exposure has also fallen to historically low levels.
According to Vanda’s latest research, institutional net exposure to U.S. equities remains at a very low net-long level. Its composite U.S. equity positioning indicator, which briefly climbed close to +2 in August, has now slipped back toward the zero line.
This data has two sides.
On the one hand, it suggests that U.S. equities are unlikely to suffer a crash-like collapse. Bullish positioning is not extreme, so a reversal in sentiment would not necessarily unleash overwhelming selling pressure.
On the other hand, from an institutional perspective, the U.S. equity market is far from a consensus long. As a result, the upside path is not particularly clear either.
Now consider retail investors. According to J.P. Morgan’s Retail Radar, during the week of September 10 through September 16, retail investors sold technology funds and most individual stocks, but bought roughly $1.6 billion worth of the “Magnificent Seven” stocks.
Over the same period, net flows into individual equities were approximately negative $600 million. On a comparable basis, that implies that all stocks outside the Magnificent Seven saw roughly $2.2 billion in net selling.$英伟达(NVDA)$ $美光科技(MU)$ $特斯拉(TSLA)$ $苹果(AAPL)$ $微软(MSFT)$ $Meta Platforms, Inc.(META)$ $谷歌(GOOG)$ $亚马逊(AMZN)$
What do these numbers tell us?
They suggest that retail investors are not displaying indiscriminate dip-buying enthusiasm toward the broader equity market. Following the declines of the previous two weeks, their dip-buying was highly concentrated in the seven mega-cap technology names. Retail bullishness is clearly differentiated rather than broad-based.
Vanda’s research supports this conclusion as well. Over the latest trading month, retail buying—namely dip-buying—in ETFs and individual stocks declined again.
The 20-day rolling net trading volume in individual stocks has fallen from prior highs in the $20 billion range to near the zero line. On an all-listed-securities basis, net buying has declined from more than $30 billion to around $10 billion.
Based on current flow data, I do not view the breakout in U.S. equity indices as having a compelling chance of producing a sustained advance. I believe the major pullback before the midterm elections has not yet arrived, and the market is unlikely to escape it.
There is, however, one point that requires caution: over the past five days, retail traders have been actively trading calls. Call-buying volume has surged, directly pushing up call premiums.
Within the single-stock options flows tracked by Vanda, retail net out-of-the-money option premium in CRWD reached nearly $12 million in a single day—an extreme level relative to the past year or more.
Putting institutional and retail flow directions together creates a fairly clear picture. The current uptrend is characterized by relatively low concentration of broad bullish expectations and limited underlying upside momentum, but very large short-term upside bets.
That is precisely the kind of environment in which selling puts at appropriately low strike levels feels most comfortable.
IV. The Crack: 52.6% and a “Higher Trading Range”
Technically, the S&P 500’s price action displays a highly familiar pattern. It closely resembles the previous breakout from a trading range: once the index broke above the daily-chart resistance line, it accelerated higher.
The most likely outcome, therefore, is a repeat of the prior pattern: the market forms another consolidation range at a higher level, attempts to build a top there, and then declines.
$纳指100ETF(QQQ)$$标普500ETF(SPY)$ $标普500(.SPX)$ $SP500指数主连 2609(ESmain)$ $微型SP500指数主连 2609(MESmain)$ $标普500波动率指数(VIX)$
Meanwhile, market breadth has already flashed a yellow warning light.
The percentage of S&P 500 constituents still trading above their 200-day moving averages has fallen sharply from more than 75% in August to 52.60%. In other words, the index is making new highs, but the number of individual stocks participating in the advance is clearly shrinking. Participation in the rally has deteriorated materially.
On one side, institutional participation is low. On the other, upside breadth is narrowing. In between sits a group of retail investors using leverage to chase calls.
A new high built on this foundation looks more like a sprint than the beginning of a new, durable move. The conclusion is therefore not difficult to draw: after making new highs, U.S. equities are likely to top out and decline.
V. The Taut String That Has Not Yet Loosened: The Two-Year Treasury Yield and the U.S. Dollar Index
To judge how much further this rebound can run, two indicators matter more than anything else.
The first is yields.
The 10-year Treasury yield has already pulled back from the key 5% threshold I highlighted previously. More important, however, is the two-year Treasury yield. It has formed a technical topping structure within its uptrend: not only has it produced a “high-9” signal—the exhaustion count at the top of the DeMark Sequential—but the upper boundary of its rising channel has also become effective resistance.
If the two-year yield declines in line with these technical signals, it would indicate that expectations for three additional rate hikes have been fully priced in. In that scenario, U.S. equities would likely continue moving higher in the short term, and gold could continue rebounding as well.
The second—and currently the most important—indicator is the U.S. Dollar Index.
Last week, the Bank of Japan and the Federal Reserve announced their respective rate decisions. Waller’s remarks appeared hawkish, and the market’s short-term pricing action also reflected increasingly hawkish expectations. The expected total number of rate hikes for this year and next has risen, and the probability of two further hikes this year has also increased.
What I remain uncertain about is the total scale of this tightening cycle in basis points. The market has not reached a consensus, nor is there a clearly fair pricing benchmark.
Based on the previous peak in the two-year Treasury yield at 4.7%, the market had been pricing in 100 basis points of tightening over the current cycle: three hikes this year and one next year.
However, after Waller’s remarks, the two-year yield did not stop rising. After reaching a high of 4.772%, it continued moving higher along its five-day moving average. The Dollar Index paused around 100.5, but quickly resumed its advance above the five-day moving average and is now trading around 100.33.
What does this mean?
It suggests that the post-Waller reversal in hawkish pricing—characterized by a rebound in gold, lower yields, and a weaker dollar—may already be over.
If the Dollar Index continues rising, breaks above 100.5, and holds above that level, while the two-year Treasury yield again breaks above 4.7% and continues higher, it would indicate that the market has started pricing in additional hawkish expectations that had not been reflected ahead of the FOMC meeting. In that case, the prior hawkish trend would remain intact.
The clearest implication is that gold may be forming a short-term top and could continue weakening. The area around $4,415 is an extremely important resistance level for gold, and this rebound is unlikely to break through it.
Correspondingly, the euro has continued weakening after encountering resistance around 1.1650. It is currently hovering near 1.1517. A break below that level could be viewed as the start of a new down leg in the euro.
VI. Crude Oil Is Trapped: Trump Above, Iran Below
Now let us turn to crude oil.
Crude is currently oscillating within a range that has a ceiling above and a floor below. The floor is near the 20-day moving average; the ceiling is near the previous high around 106.8.
This range is not simply a technical construction. It has been forced into place by two opposing forces. On the upside, Trump is keeping a lid on prices and preventing a breakout. On the downside, Iran is unlikely to allow crude to fall below the 20-day moving average. Everyone knows what I mean.
In other words, the conflict between the United States and Iran has not clearly ended, but the odds of continued escalation also appear limited. This state of stalemate makes it more likely that crude will continue to oscillate across a broad price range rather than develop into a sustained directional trend.
What is the most suitable strategy for a range-bound market?
The answer is straightforward: a calendar spread designed to profit from time decay and volatility dynamics.
$美国原油ETF(USO)$ $WTI原油主连 2611(CLmain)$ $小原油主连 2611(QMmain)$
Switching to USO, crude will most likely trade this week between 141 and the previous high near 163.
A simple calendar spread can be structured as follows:
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Sell the October 2 150-strike put, with implied volatility of 49.13% and a midpoint price of $3.63.
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Buy the October 16 150-strike put, with implied volatility of 48.38% and a midpoint price of $5.88.
The net debit is approximately $2.25. You sell the near-dated option and buy the longer-dated option, profiting from the faster time decay of the front-month contract.
The payoff profile is easy to understand. If the price falls to 141 or rises to 163, the strategy produces only a small loss. As long as USO trades within a range of roughly 142 to 161, the strategy can be profitable.
More importantly, its maximum profit, at approximately $330, exceeds its maximum loss of approximately $225. The reward-to-risk profile is inherently in your favor.
If you still believe the probability of success is not high enough, you can use a double calendar spread instead: sell the September 25 145 put and 159 call, while simultaneously buying the October 16 145 put and 159 call.
A double calendar spread modestly expands the profitable price range and is also a reasonable choice, although it requires more margin.
For this strategy, we should use a break below USO’s downtrend line—around 140—as a strict stop-loss level. If USO falls below 140, immediately close the position and exit the strategy described above.
VII. What to Do Now
Bringing the analysis above into an actionable framework, I currently believe there are two most appropriate strategies for equity indices:
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Continue selling puts.
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Use lightly sized straddles when prices are elevated.
The rationale for selling puts is straightforward. In an environment where upside momentum is not particularly strong but downside selling pressure is also limited, rolling weekly sales of appropriately low-strike puts is one of the most comfortable strategies.
For specific underlyings, I continue to favor Nvidia and QQQ. For QQQ, sell puts with strikes below 685. For Nvidia, continue to use the technical reference levels we discussed previously:
The straddle, meanwhile, is a bet on an expansion in index volatility around prior highs.
Even if the indices continue to rise, I believe the VIX could rebound. Implied volatility in both single-stock and index options has declined for a long time, leaving option prices broadly very cheap.
During an accelerated advance through previous highs, index calls could experience a gamma squeeze—a chain reaction in which market makers are forced to buy the underlying, further accelerating the move higher. At the same time, put prices have little room left to fall, limiting their downside.
This asymmetry is precisely the environment in which a straddle can work. But it is critical to keep the position small. If the trade has not become profitable within one week, it should be closed promptly to limit losses.
Nvidia deserves special mention. Its one-month at-the-money implied volatility has fallen to around 30, the lowest level since before the pandemic and nearly a 10-year low.
$1.5倍做空NVDA ETF-Tradr(NVDS)$ $英伟达(NVDA)$
At these prices, it may make sense to try a straddle near the previous high: buy at-the-money Nvidia puts and calls with roughly two weeks to expiration, betting either on an accelerated upside breakout or on a pullback from elevated levels.
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