To The Moon

The anticipated pullback may already be underway: Three strategies for navigating today’s choppy market

The U.S. equity market is currently in a highly sensitive, tightly balanced high-level volatility regime. Previously, cooling macro data—including softer-than-expected CPI and PPI readings—helped ease inflation expectations and created an exceptionally favorable backdrop for U.S. equities. Supported by these conditions, the S&P 500 continued advancing and reached fresh highs.

However, renewed geopolitical tensions this week have disrupted the previous calm, as a sudden rise in crude oil prices has altered the market landscape once again. At this macroeconomic crossroads, characterized by an unusually large number of variables, the nature of the U.S. equity market’s high-level consolidation may already be undergoing a subtle shift.

To understand the current U.S. equity market, one must first understand crude oil.

The unexpected escalation in U.S.-Iran tensions has reignited the rebound in crude oil futures. Based on current price action, crude oil is likely to post a monthly gain in August.

As is well understood, crude oil is not only the lifeblood of the global economy but also a direct barometer of inflation expectations. The earlier backdrop—characterized by broadly weaker macro data, including an unexpected slowdown in CPI and PPI as well as a significant downside miss in nonfarm payrolls—had driven Treasury yields lower and caused inflation expectations to fade. That situation was disrupted overnight by the rebound in crude oil.

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As we have highlighted repeatedly, the transition pattern in asset rotation suggests that the market’s repricing of inflation expectations typically proceeds from gold to copper, and then from copper to crude oil:

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Against the backdrop of gold already having experienced a substantial rally, crude oil itself has a strong catch-up potential. Once crude oil stages a meaningful rebound, the inflation concerns that had previously moderated may be reignited. It is therefore important to recognize that crude oil volatility is currently elevated. On the one hand, oil has a strong catch-up rationale; on the other hand, its direction remains highly vulnerable to developments in the U.S.-Iran situation and could reverse sharply at any time.

The rise in inflation expectations is not a forecast; it is a genuine repricing reflected in market positioning. The two-year U.S. Treasury yield—the most sensitive segment of the Treasury curve—has resumed its upward trend alongside the rebound in crude oil after breaking below a key resistance level. This indicates that the market is once again pricing in higher yields in tandem with rising oil prices.

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Why Is the Downside in U.S. Equities Greater Than the Upside?

Higher Treasury yields are unquestionably a substantial headwind for U.S. equities currently trading at elevated levels.

The outstanding stock of U.S. Treasury debt is expected to surpass USD 40 trillion in the near future, while debt-servicing costs remain elevated.

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According to research highlighted by prominent U.S. analyst Michael Hartnett, U.S. debt-servicing costs—primarily interest expense—have exceeded USD 1 trillion over the past 12 months.

Against this macro backdrop, if the two-year Treasury yield continues rising, U.S. equities will likely face increasing pressure to correct from elevated levels. Even if short-dated yields do not rise further, long-term Treasury yields may still move higher because of term premia and the risk premium associated with large-scale Treasury issuance. This would also weigh on U.S. equities, although the transmission mechanism would likely be slower than the more immediate negative impact caused by rising short-term yields.

According to Goldman Sachs prime brokerage data, both institutional gross leverage and net leverage have changed little over the past month. This suggests that major institutional capital remains cautious about chasing U.S. equities higher and has not positioned for another sustained one-way rally. Goldman Sachs has even estimated that the S&P 500 may peak at approximately 8,000 in 2026. With the index currently close to 7,800, the implied upside is only around 3%.

In addition, market breadth within the technology sector is elevated: the share of constituent stocks trading above their 200-day moving averages has reached a high level by recent historical standards. Under such broad-based bullish participation, market breadth may remain resilient for several weeks, but it is unlikely to persist for long—generally not beyond two months.

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Taken together, the combination of renewed inflation uncertainty and upward pressure from Treasury yields is increasing the risk of a pullback in U.S. equities from elevated levels. Over the near to medium term, the market’s downside potential now appears greater than its remaining upside.

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Survival Rules for a Volatile Market: Selling Puts for Time Value Income and Using VIX Straddles for Risk Control

In a high-level, high-volatility range-bound market, taking outright directional long or short positions is not an optimal approach. The core strategy should shift toward capturing time decay and trading volatility.

First Approach: An Option-Selling Strategy Designed to Capture Time Value

If the market is likely to remain range-bound at elevated levels, systematically selling out-of-the-money index puts through a rolling strategy may represent a relatively prudent approach. The post-gap-up price gap and the 20-day moving average can serve as reference points for strike selection. Consider selling puts below these reference levels, around the neckline area, on a rolling seven-day weekly basis. A strike near 685 may be considered.

If the market remains flat or fluctuates moderately, the option premium can be retained as income. However, rigorous risk control is essential. If the index breaks below the gap-up level or the 20-day moving average, or if the S&P 500 continuous futures contract falls below its 20-day moving average—which represents an important short-term risk-control level—the short-put position must be closed decisively to limit losses.

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Second Approach: A Straddle Strategy Positioned for a Gamma Squeeze

The VIX has remained at extremely low levels, below 15, for an extended period. Based on seasonality and historical patterns, after reaching a six-month low, the VIX may remain stable for the first several weeks. However, it has often experienced a sharp surge during the one- to two-month period preceding U.S. midterm elections.

When the S&P 500 is at risk of breaking below the lower boundary of its consolidation range—for example, when the S&P 500 continuous futures contract breaks below the lower end of the trading range—it may be appropriate to establish a small long straddle.

Purchase both a put and a call with the same expiration date, generally more than 14 days out, and with the same strike price—typically at-the-money. If the equity market experiences a meaningful decline that triggers a rise in fear, the objective is to benefit from a short-term gamma squeeze that drives a substantial appreciation in the put leg, allowing the overall position to become profitable.

However, this strategy requires extremely strict stop-loss discipline:

Monitor key VIX levels closely. If, after entering the straddle, the VIX fails to establish itself decisively above a key support level such as 14.8, or breaks back below that level, it indicates that volatility is failing to rise. In that case, the position should be stopped out immediately; no attempt should be made to remain in the trade.

Guard against event risk. For example, unexpected remarks that reverse expectations for monetary tightening, or another “TACO”-type statement by Trump regarding the U.S.-Iran situation that abruptly reverses the decline in equity indices, would also warrant immediately closing the straddle position.

Third Approach: Systematically Sell Low-Strike Gold Puts

Continue rolling short put positions in gold at low strike prices. For GLD, consider selling puts expiring in six days with strikes below the 20-day moving average, around 382–381. If GLD falls below the strike price, close the position immediately to stop the loss.