3 Takeaways

• Expect a potential short-term rebound in the S&P 500 as volatility resets following Friday’s spike.
• Watch for resistance near the 6,600–6,650 levels, where mechanical buying may stall.
• Monitor systematic fund flows—volatility-control and CTA strategies could turn into net sellers if realized volatility stays elevated.

The S&P 500 fell by more than 2.7% on Friday, which came as a big surprise to many. While the size of the decline was certainly unexpected, the change in trend was not. What’s important to note, however, is that one-day implied volatility, as measured by the VIX 1-Day Index, rose sharply on Friday. That means there’s a good chance the S&P 500 could see a sizable rebound on Monday—at least to start the day—as volatility resets and the VIX 1-Day comes down.

(Click on image to enlarge)

The logical place to find resistance on Monday would be around 6,600 and then 6,650. One would think that once the VIX 1-Day stabilizes, the stock market will also steady, and the rally would likely stall. A VIX 1-Day reading of 25.7 suggests a potential move in the S&P 500 of about 1.6%, which would take the index right up to the 6,650 region.

(Click on image to enlarge)

The short-volatility metrics, however, matter less, because if the S&P 500 rises by more than 1% on Monday, realized volatility will also increase. That likely means volatility-control funds will become more active as they begin unwinding some of their short-volatility/long-equity positions. In fact, one-month realized volatility rose above three-month realized volatility on Friday, which serves as a trigger point for vol-control funds to sell.

(Click on image to enlarge)

Additionally, CTA flows have likely come into play and are now probably turning into sellers as the 20-day moving average trends lower. That means any morning buying could be met with afternoon selling.

(Click on image to enlarge)

Obviously, things can always play out differently, but I think it’s important to frame that a rally to start on Monday is highly probable—and if it does occur, it will likely be the result of mechanical effects from volatility resets. Once we get past that mechanical reset, however, everything that led up to Friday’s sell-off remains largely unchanged. Dispersion is still high, correlations are still low, and the spread between index and constituent volatility remains elevated. That means there’s still risk as we head into earnings season, which really begins on Tuesday with the big banks, a further unwind may be required.

(Click on image to enlarge)

Clearly, a worst-case scenario would be if the index continues to decline—which is certainly possible. That would also imply the VIX 1-Day is still rising, putting us in a situation similar to April 2025 or March 2020, where the damage from Friday’s decline proved much deeper than usual. There’s really no better way to handicap it than that.

Perhaps I’m just being overly granular about Monday’s open and trading dynamics, but I want to emphasize that, as of now, unless we see the 20-day moving average on the S&P 500 turn higher or realized volatility begin to drop, there’s a very high likelihood that systematic funds will be sellers. They don’t care about TACOs—they are rules-based, and those flows can have significant impacts on the market.

More By This Author:

Why Did The S&P 500 Drop So Fast?
The 3 Ghosts Of Tighter Financial Conditions Loom Over Equities
Dollar Index Breaks Resistance As S&P 500 Momentum Stalls