Nomura’s McElligott: ‘Folks Are Emerging From The Bunker’

For most of 2021, scouring the equities vol space for signs of crash-up positioning suggested market participants see scope for the new zeitgeist (i.e., reopening, reflation, and an economic renaissance, especially in the US) to juice cyclical value.

Outside of that, though, inferred expectations for a broader melt-up appeared muted in favor of a preference for guarding against a traditional crash — of the “down” variety, I mean.

“Upside had been an afterthought at best,” Nomura’s Charlie McElligott said Friday, in the course of suggesting that on the heels of the recent purge in the Nasdaq and attendant froth-siphoning (if you will) in bubbly pandemic winners, the situation appears to be shifting, albeit subtly at first.

“We are now see seeing signs that folks are emerging from the bunker and looking at broad market / SPX ‘crash-UP’ potential again,” he wrote, noting that while “downside Put Skew is still high… it’s becoming less extreme” as the first signs of an upside exposure grab are emerging. “We finally see SPX upside Call Skew going ‘bid’ in just these past few days,” Charlie remarked.

Perhaps understandably given the maddening overhang from Treasurys that can’t hold a bid (see Friday’s unfortunate overnight dramatics), nobody is particularly excited about the prospect of a new melt-up in big-cap tech.

“There remains utterly negligible interest in upside” there, McElligott noted. The recent de-rating notwithstanding, there’s “no ‘FOMO’ for secular growth,” he said.

I’d venture to say that’s not surprising. Again, the prospect of another mini-tantrum in rates is a psychological impediment and besides, big tech is still far from “cheap” (figure below).

Meanwhile, in the background, recent fireworks mean realized vol is still elevated, and that, in turn, entails mechanical de-leveraging and exposure reduction from vol control.

On Nomura’s estimates, the vol control crowd has sold more than $21 billion of US equities over the past two weeks.

Finally, Charlie said Friday that at least one of the key dynamics keeping the VIX complex in a perpetual state of “brokenness” could be on its way to resolving.

If that’s too strong, we can say that the supply/demand imbalance could at least ease.

“VIX ETN Net Vega is now down ~$60mm from its earlier peak a few weeks back,” he noted, adding that while “this will not single-handedly release the VIX universe tension” or ameliorate a structural dearth of vol supply, “an overshoot in hedging for a ‘doomsday’ scenario may in fact have the ability to generate a ‘crash-UP’ as we simply cannot realize really high implied volatility.”

If you’re looking for a recent analog, the post-election dynamic was a good example.