If there’s no good news from the Middle East over the weekend, the probability of U.S. stocks continuing to drop on Monday is pretty high. On Friday, U.S. stocks closed with the VIX at its highest level… At the same time, SPX’s RV started surging, which means some funds that use vol-targeting for position management will be forced to reduce their holdings on Monday. This could trigger selling pressure between Monday and Tuesday. If Monday sees another -2%, it could snowball further. Also, with the VIX closing at its peak, it shows that even until the last minute, people were still buying protection and no one was shorting volatility to hold through the weekend. (If the VIX spikes and then falls, it indicates panic has been digested and the market is easing. On the other hand, if the VIX closes at its peak, it means panic persists, and institutional risk hedging wasn’t completed before the close.) So, on Monday, there are a few forces at play: 1. Selling pressure from vol-targeting funds 2. Continued pricing in of no good news over the weekend 3. Options market makers and negative gamma — SPY closed below the 740 put wall on Friday, which could amplify the downside. If there’s no good news from the Middle East, the chances of inertia-driven selling continuing into Monday and Tuesday are pretty high… The silver lining is that once the vol-targeting funds finish their selling, they’ll stop. So after this wave of inertia-driven selling ends, the market will feel much lighter. If there’s good news, we could see a quick V-shaped recovery. This time, it’s also tied to Wednesday’s CPI data… so Wednesday is even more critical. If CPI meets expectations, the market will likely continue to consolidate and wait for the FOMC. If CPI runs hot, the market will further price in rate hikes, potentially leading to more valuation cuts. (And keep in mind, if it gets to this point, it could trigger CTA flipping short, bringing a second wave of selling.) If CPI cools, there’s a pretty good chance of a V-shaped recovery on Wednesday. So, for those looking to buy U.S. stocks, it might be better to wait until after Wednesday’s CPI release. Also, while the VIX closed at 21, next week’s ATM IV is only 17-18% (lower than the past 5 days’ RV), which suggests some people are selling volatility and betting on mean reversion. Plus, after the June quarterly options expiration on 6/18, IV drops to just 14%. This shows the market is currently only pricing risk through June 18 (post-FOMC meeting). For now, systemic risk isn’t being priced in. (Unless next week’s long-dated IV also rises above 18%, then it’s time to be cautious.) So, as of now, this wave’s direction will be decided by Wednesday’s CPI, and next week’s FOMC will confirm the trend… The real trend (whether up or down) will likely start after the June quarterly options expiration on 6/18, during the week of 6/22.