By Steven M. Sears
Sounding smart is easier than making money.
The latest setting for this scenario is this week's Federal Reserve interest-rate-setting committee meeting. If all goes to plan, we will see the first of several rate cuts.
Lower rates are mostly good for stocks and the economy, but palavering pundits can't resist crafting scary narratives that seem infused with great erudition.
The Cboe Volatility Index, or VIX, plays a leading role in their bearish narratives, because so few people understand it. The so-called fear gauge is now at an unusually low level, which is normal when stocks are rising -- but that doesn't stop pundits from wrongly insisting investors are complacent about risks.
And what are those risks? The S&P 500 is historically high, and some big technology stocks are making multibillion-dollar bets on the promise of artificial intelligence. The market's concentrated leadership is another one, even though corporate earnings have broadly increased.
To make the moment more dramatic, President Donald Trump keeps advocating for lower interest rates and is sharply critical of the Fed's economic analysis. He wants to replace Chair Jerome Powell, and some governors, to force lower rates.
It's always easy to frighten investors. Many analysts, traders, and strategists want to be quoted in the media, guaranteeing that anything floating on the market's surface can be turned into a seemingly sagacious essay backed by historical facts -- such as October's fearsome record of market corrections.
Today, as scary stories multiply, it's easy to detect the scent of Eau de Internet Bubble, with a subtle banana republic undertone, hanging in the market air.
The dour navel-gazing seems bad, but it probably isn't. Well-trod risks -- the market is too hot and poised to fall -- are usually reflected in stock prices. Undiscussed risks aren't.
John Marshall, Goldman Sachs' derivatives strategist, advised clients in a recent communiqué that institutional investors are engaged in a "broad re-risking from neutral positioning." Futures, swaps, and options activity shows that macro-asset allocators -- considered the market's most sophisticated investors -- are now bullishly positioned, he wrote.
"We see this as a tailwind for equities over the coming weeks, just as it was a headwind in January to April," Marshall told clients.
This positioning is increasing demand for bullish call options.
Until recently, we have been measured ahead of the Fed meeting. Now that risks seem to be easing, it makes it easier to have conviction that stocks can advance in a lower-rate environment.
Last week, we recommended that investors look at Walmart. The Select Sector Financial SPDR exchange-traded fund (ticker: XLF) also seems well positioned. The sector is hovering around record highs, and three of our favorite financial stocks, KKR, Interactive Brokers Group, and Robinhood Markets, are in fine form.
Hedge funds and other investors will likely buy the ETF to establish exposure while they identify stocks that can outperform the sector as rates decline. Aggressive investors can try to benefit with a simple trade: buying bullish XLF calls.
With the ETF at $53.56, the December $55 call could be bought for about $1.28. At $60, the call is worth $5. The expiration covers the Fed's October and December meetings. During the past 52 weeks, XLF has ranged from $42.21 to $54.25.
If the ETF is below the strike at expiration, the trade fails. That seems unlikely, though. Lower rates should reawaken housing sales and the appetite of consumers to borrow money to finance consumption, which would benefit corporate earnings and stocks, too.
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September 17, 2025 02:00 ET (06:00 GMT)
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