War escalates, markets up, oil down 🙃
Last week of the Q2 competition!
Quick summary:
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Markets remain range-bound, with SPX stuck between 5,940 and 6,040 as uncertainty around inflation, tariffs, and geopolitics limits momentum.
The Middle East conflict escalated over the weekend as US attacked Iran, and Iran retaliated on Monday by attacking a US base in Qatar. As we said on Saturday: “if Iran escalates, don’t panic. Wait a bit, then buy the dip and/or short vol.”
Markets went up across the board, VIX was down, oil down 7%!
And then Monday night, a ceasefire was announced, by Trump, and markets continued their ascent. WWIII cancelled.
At last week’s FOMC meeting, the Fed signaled stagflation risks, projecting slower growth and persistent inflation, while staying firm on no near-term rate cuts. However, some members are already suggesting they should reconsider cutting rates.
The May PCE report is scheduled on Friday, GDP numbers on Thursday. These two prints will reexamine the stagflation narrative the Fed pushed last week. Also, Powell testifies in front of Congress today and tomorrow, should be feisty.
The competition
We’ve made it to the final week. The range hasn’t cracked, but with Powell, PCE, and rising tensions in play, this could be the shake-up. The leaderboard’s tight—every move matters!
Keep your strategies sharp and your eyes on the top!
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Last week’s performance
Markets remain stuck in a tight 100-point range, with SPX trading between 5,940 and 6,040—a narrow 1.6% spread that reflects the lack of conviction on either side. The Fed’s latest dot plot leaned hawkish, projecting a stagflationary setup: weaker growth, higher inflation, and no near-term rate cuts. That tone alone was enough to cool any bullish momentum last week. Add in unresolved tension between Israel and Iran, and you get why June has felt so paralyzed. Macro data still shows strong labor and over 3% GDPNow, but until uncertainty clears, this isn’t your usual uptrend. It’s a kangaroo market: jumpy, indecisive, and not worth chasing unless something breaks the range.
This week we will get some macro data to reevaluate whether we heading in the right direction (soft landing) or not (stagflation). Attention turns to Fed Chair Powell’s testimony before Congress today and tomorrow, the May PCE report on Friday, and the GDP data on Thursday. Unless there’s a clear shift in tone or data, expect more choppy, sideways action.
You also might have noticed that, over the weekend, the US entered the war with Iran, bombing their nuclear facilities, and on Monday Iran retaliated by attacking a US military base in Qatar. By the end of the day, after market close, a ceasefire was announced.
This is what we had to say on this in our Saturday morning newsletter:
However, remember that war-induced vol spikes are always temporary, and when they mean-revert the upside push can be really strong. So if this does happen (hopefully it doesn’t), it is a good opportunity to short vol - i.e. short the VIX (through one of its ETFs like UVXY or VXX).
Recall the game theory matrix in case of WWIII:
- Buy & no WWIII: make big profits
- Don’t buy & no WWIII: you missed out
- Buy & WWIII: money is irrelevant
- Don’t buy and WWIII: money is irrelevantThe doomsday narrative only lasts so long, the VIX spike presents a good short opportunity, the dips get bought, and we have a short squeeze on the way up.
Therefore, if Iran escalates, don’t panic. Wait a bit, then buy the dip and/or short vol.
Market reaction to the war escalation yesterday?
SPX up 1% on Monday, (after a brief sell-off earlier in the day), VIX was down 3% (and again below 20), while briefly going over 22, and oil - of all things - fell 9%:
How’s that for doomsayers? Panics are buying opportunities, and even panics don’t last very long anymore.
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