Good afternoon, traders. I hope everyone is enjoying their weekend and preparing for the trading week ahead. We have several inflation reports coming out: CPI on Wednesday, October 14, PPI on Thursday, and import and export prices on Friday. These should give us a better idea of whether higher costs are working their way further into the economy.
But before that, a little update. I’m finally in the process of fully moving into my place. It has been a long and arduous process. My dog Max is doing a little better and eating more. His care is becoming more expensive, but having him around when I thought I was going to lose him has been humbling, and I’m thankful. It’s something to see a little dog have that much resilience.
The woman who left is still absent. I have no way of knowing what she might do. It still affects me, but it isn’t preventing me from doing things. I’m still optimistic that she might return, but I’m not putting my life on hold for that to happen.
All of these things were barriers to returning to trading. However, I’m preparing to return with a more complete view of the markets. There’s more to trading SPY options than picking a strategy and looking at what SPY is doing.
I created a site through ChatGPT to mimic the markets, which has been helping, and updated my Thinkorswim watchlist. It starts with Treasury yields and the MOVE index, then SPY, advance-decline readings, up and down volume, and TICK. From there, I’m watching one-day and nine-day volatility, the VIX, and three- and six-month volatility, alongside the Dow, Nasdaq, Russell, and S&P 500 sectors. I want to see whether these markets are confirming each other.
With that said, the Fed is still leaning toward tighter policy. The September minutes showed that most officials expected another increase before year-end, although that doesn’t mean they all want another hike immediately. Initial claims remain below 200,000, showing that layoffs are low. That doesn’t necessarily mean hiring is strong. Inflation remains a major concern, while the labor market hasn’t shown the deterioration that would make easing more urgent.
This past week, the S&P 500 led the major large-cap indexes higher, with the Dow and Nasdaq also rising, while the Russell fell. To me, that shows participation is still uneven. Small caps are often more exposed to refinancing costs, so their weakness makes sense with yields elevated. I would feel better about the rally holding if the Russell began participating, although its weakness alone doesn’t mean SPY has to fall.
Yields retreated from their midweek highs, with the two-year finishing around 4.80%, the ten-year at 5.24%, and the thirty-year near 5.60%. The weekly declines were small and similar across maturities, leaving the curve’s shape almost unchanged. That’s some relief, but borrowing costs are still high.
I’m also watching real yields and breakevens. High real yields can pressure valuations even without a sharp increase in inflation expectations. Expected Fed policy, growth, and the extra compensation investors require for holding longer-term bonds can all play a part. I’m checking SOFR against the Fed’s administered rates as well, looking for any signs of funding pressure.
Credit deserves attention because the pressure isn’t spread evenly. Through Thursday, broad high-yield spreads had widened only modestly from the previous Friday, while CCC-and-lower spreads widened much more. Investment-grade spreads actually tightened. That tells me the weakest borrowers are facing more concern, while stronger companies still have the market’s confidence. A high-yield spread in the 300-basis-point range alone isn’t enough to call broad credit stress. I want to see whether the widening continues and spreads into stronger borrowers.
The consumer is also feeling the pinch. University of Michigan sentiment slipped again, with current conditions falling sharply and both near- and longer-term inflation expectations rising. Mortgage rates around 7.4% make buying or refinancing less attractive. High borrowing costs and everyday prices leave households with less room to spend. However, weak sentiment doesn’t automatically mean spending has collapsed. I need to see that pressure show up in actual activity.
The ISM services report showed continued expansion, but the details deserve attention. New orders grew more slowly, supplier deliveries slowed, and the prices index rose to 74, its highest reading since July 2022. Employment returned to slight expansion, but one month isn’t enough to establish a trend. Businesses are still seeing demand while facing higher costs. If they pass those costs on, consumers feel it. If they can’t, margins can come under pressure.
The New York Fed’s supply-chain measure also rose, although it remained below May’s peak. Its consumer survey showed higher one- and three-year inflation expectations, while five-year expectations stayed unchanged. Households are expecting more inflation in the nearer term and reported more concern about their finances. A sustained pullback in spending could eventually hurt production and employment. That is a risk I’m watching, but the current expansion hasn’t given way to that outcome.
Abroad, the picture is also uneven. In Japan, real wages continued to rise, but household spending remained below a year earlier. That shows better pay hasn’t yet produced a strong spending recovery. AI-related demand is helping businesses, while consumers remain cautious. This gives the BOJ competing signals. I’m watching its guidance, the yen, and whether Japanese investors begin shifting more money back home as rates normalize.
China had limited data during Golden Week. Travel remained active, but spending per domestic trip fell, and box-office revenue dropped sharply. Consumers are still spending, but they’re being selective. Movie releases and more overseas travel also affected those figures, so I wouldn’t use box-office weakness alone to judge the whole economy. The larger issue remains whether strength in technology and exports can produce a broader recovery in domestic demand while property stays weak.
In the euro area, retail sales barely increased after the previous month’s decline, while inflation moved higher, led by energy. That leaves consumers under pressure and gives the ECB less room to ease. Europe and Japan remain exposed to expensive imported energy. So while parts of the global economy are holding up, that strength isn’t reaching every household or industry equally.
Going into this week, my base case is that SPY can hold its recent breakout, but I want to see buyers defend it and participation improve. I’m not ready to call for a breakdown just because yields are high. AI and earnings expectations are still providing support, while credit is showing more concern at the weakest end than across the entire market.
If inflation comes in hotter than expected, Treasury yields rise, credit spreads widen further, and SPY falls back into its old range with weakening internals and rising volatility, I would start looking for a bearish trade. A failed attempt to regain the breakout would give that view more weight.
If inflation moderates, real yields come down, and credit remains steady or improves, I think the move higher can continue. Broader sector participation would make me more confident. Energy remains the wild card because another supply disruption or escalation in the conflicts could quickly change the inflation picture.
Right now, I’m more interested in debit spreads than outrights if a directional move develops. A butterfly would depend on SPY actually settling into a range after the reports. Since I trade same-day options, the weekly view gives me context, but the intraday chart, option pricing, and risk still have to support the trade. If they don’t, I can wait.