To The Moon

Just this past Monday, the S&P 500 index successfully broke through its 20-day moving average, while the Nasdaq index solidly reclaimed its 20-week moving average. According to the technical rules I outlined previously, when these two critical indicators are breached simultaneously, we should pivot our stance to the upside in alignment with the trend. Sure enough, within just one day, both major indices surged another few percentage points, and the S&P 500 even came close to returning to its previous high, right where the initial drop began.

Looking at this price action, I believe many are already declaring "the return of the king" for US equities, assuming the market has completely finished its shakeout and re-entered a primary uptrend. However, I must issue a warning: the current movement in US stocks is merely a short-term, sentiment-driven rebound. It is still too early to assert that the market has undergone a definitive reversal. Under current conditions, we must avoid being dogmatic "permabulls." Instead, we need to view the current market landscape through the lens of a "high-level consolidation period."

Why? Let's break down the market logic step by step.

$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $E-mini S&P 500 - main 2609(ESmain)$ $Micro E-mini S&P 500 - main 2609(MESmain)$ $Cboe Volatility Index(VIX)$ $Invesco QQQ(QQQ)$ $NASDAQ(.IXIC)$ $E-mini Nasdaq 100 - main 2609(NQmain)$ $Micro E-Mini Nasdaq 100 - main 2609(MNQmain)$ $Invesco QQQ(QQQ)$ $SPDR S&P 500 ETF Trust(SPY)$

Illusion vs. Reality: Who Is Really Driving US Stocks Higher?

The market generally attributes this rebound to two direct catalysts. The first is an unexpected easing of US-Iran tensions (which I won't delve into deeply here, but it certainly served as a sentiment booster). The second—and most widely discussed—is the coordinated intervention by the US and Japanese governments to support the yen, which caused a sudden plunge in the US Dollar Index, inadvertently propping up US equities.

However, this logic is actually quite forced. Rather than saying the yen intervention "saved" US equities, it would be more accurate to point to the somewhat "dovish" statement delivered by Federal Reserve official Christopher Waller following the FOMC meeting, which triggered the dollar sell-off. You must understand that in an environment where the market desperately needs a Fed rate hike, or at least a hawkish stance to suppress inflation expectations and long-term bond yields, Waller's post-FOMC comments—while not explicitly ruling out hikes—hinted at a reduction in the frequency of future meetings. This move was easily interpreted by the market as a signal of policy easing and blurred forward guidance, making it appear as though he was intentionally dampening market expectations for future rate hikes

Against this backdrop, the news of the joint US-Japan intervention to support the yen merely acted as an accelerator for the dollar's decline right as it was already falling. More importantly, is a depreciating dollar truly an absolute positive for US equities? Not necessarily. A depreciating dollar means that dollar-denominated assets, such as US Treasuries and US stocks, are "shrinking" relative to other currencies. Take a look at the bond market after the FX intervention news broke: yields on US 2-year, 10-year, and 30-year Treasuries did not plunge; instead, they crept slightly higher. This was especially true for the 2-year Treasury yield, which is the most sensitive gauge for pricing in rate hike expectations.

$US2Y(US2Y.BOND)$ $iShares 20+ Year Treasury Bond ETF(TLT)$

What does this indicate? It shows that Japan's FX intervention did not fundamentally improve the liquidity environment for US equities. The surge in US stocks over the past two days is essentially just a short-term, impulse-driven rebound triggered by short sellers rushing to cover their positions following the dollar index's sharp drop. Its foundation is weak, and volatility could flare up again at any moment.

$China A50 Index - main 2608(CNmain)$ $Hang Seng Index - main 2608(HSImain)$ $Hang Seng Tech Index - main 2608(HTImain)$

The Hidden Minefield of Yen Intervention: Carry Trade and Sell-Off Risks

Having clarified the true nature of the rebound, we cannot ignore the real hidden dangers brought about by the Bank of Japan's FX intervention. If the Japanese government continues to intervene over the coming weeks to rescue the yen, causing massive fluctuations in the exchange rate, US equities could suffer severely.

As we all know, there is a massive global "yen carry trade"—capital that borrows yen at extremely low costs and pivots to buy higher-yielding Western assets, including large quantities of US stocks and Treasuries. If the yen appreciates sharply beyond expectations due to government intervention, the borrowing costs for this international capital will spike instantly. To meet margin requirements or lock in profits, they will be forced to aggressively sell off their Western asset holdings. Recall the last two years: almost every time the yen appreciated sharply, it was accompanied by a spike in US equity volatility (the VIX index) and severe market turbulence.

Furthermore, the VIX index is currently hovering at a relatively low level, and historically, its seasonal trend is upward.

Looking back at history, every intervention by the Japanese government has resulted in a substantial appreciation of the yen. In terms of magnitude, the yen's adjustment last week was negligible

Therefore, the resolve and intensity of the Japanese government's intervention is not just forex market news; it is a highly crucial "reference indicator" for judging the future direction of US equities. If the yen continues to surge, it is highly likely to trigger a vicious wave of selling from the highs in the US stock market at any time. So, what are the key observation levels for the yen? Looking at the technical setup for the USD/JPY currency pair: 155 is a critical resistance level. Once this level is broken and the yen continues to accelerate its appreciation, we must be highly alert to the potential for severe selling pressure emerging from the highs in US equities. $Japanese Yen - main 2609(JPYmain)$ $Invesco QQQ(QQQ)$

The Inescapable Gravity of Valuations and the VIX Bottoming Signal

Beyond the external threat posed by the yen, the internal situation for US equities is not relaxed either. The market has still not shaken off the valuation squeeze caused by surging long-term bond yields. $US10Y(US10Y.BOND)$

Historically, whenever the 10-year US Treasury yield crosses the 4.5% warning line, the S&P 500 almost invariably suffers a fierce downward plunge. The current price action mirrors the exact playbook we saw from late 2024 to early 2025: the market chops sideways for a period, perhaps even prints a new high to lull everyone into complacency, and then suddenly drops a massive bearish candle to smash the market.

At the same time, referring to the average trajectory of the S&P 500 prior to every November midterm election, the pattern is: drop first, then rally, and then smash again.

Therefore, we have every reason to believe that US equities will very likely experience a sizable drawdown within the next six months. So, how should we formulate our strategy during this confusing, choppy period? The answer lies in volatility.

Currently, the VIX (Fear Index) is at a relatively low level. Judging by its technical pattern and seasonal tendencies, it is showing a very clear trend of bottoming out and rebounding. A low VIX means that options pricing in the market right now is exceptionally cheap, providing us with excellent cover to deploy strategies suited for a choppy market. $Cboe Volatility Index(VIX)$ $BOOSTVIX2.25X(VIXL.UK)$ $ProShares Ultra VIX Short-Term Futures ETF(UVXY)$

Strategic Deployment and Execution

Since our assessment is that the market is in a weak, high-level consolidation phase and could experience massive swings at any moment due to reversals in the yen exchange rate or geopolitics, we should not make unilateral bets on either a rally or a crash.

Capturing Volatility Through Straddles/Strangles: Consider redeploying a straddle/strangle strategy on the QQQ (Nasdaq 100 ETF) near the previous highs of the S&P index. This involves buying a put and a call with the same strike price, expiring in two weeks. The core logic is to bet on the VIX bottoming and rebounding. Should the market suddenly change face and experience massive volatility, the profits generated from the soaring volatility will be enough to cover the premium costs. Of course, we must adjust our take-profit and stop-loss levels dynamically based on the movement of the VIX. If the S&P accelerates past its previous high—indicating that market sentiment has completely lost control to the upside—and the VIX continuously breaks below support levels, we must decisively cut losses and exit; the loss will be manageable.

Selling Out-of-the-Money Options to Collect Premium: In a range-bound environment, we can continuously roll short positions on out-of-the-money QQQ calls and puts, positioned roughly 10 percentage points above and below current levels, on a weekly basis to steadily collect premium.

Diversifying Defensively into Gold: Although US equities are difficult to trade right now, we can shift a portion of our exposure into gold. Consider rolling short put options below gold's 20-month moving average to capture arbitrage profits, and wait for gold to break out of its sideways range before using futures to catch the rebound. $Gold - main 2612(GCmain)$ $E-Micro Gold - main 2612(MGCmain)$ $1-Ounce Gold - main 2612(1OZmain)$ $SPDR Gold ETF(GLD)$ $iShares Silver Trust(SLV)$ $Silver - main 2609(SImain)$ $Dow Jones(.DJI)$