It’s been “short vol manna from heaven” lately, Nomura’s Charlie McElligott said Tuesday.

This is a familiar tale by now, but it’s worth recapitulating given that market participants perpetually underappreciate the read-through of these “esoteric” dynamics for equities, a blind spot which leaves too many top-down folks fumbling in the dark for fundamental answers when stocks refuse to cooperate with what often come across as well-reasoned, wholly rational bear cases.

Somewhat perversely, I’ll start by noting that there is a fundamental factor in play: Earnings season dispersion, as company-specific news creates a “winners versus losers” juxtaposition. That offset creates a “correlation crunch,” as McElligott put it.

The Bloomberg figure above (SPX one-month realized correlation) underscores the point. At the same time, results were broadly better-than-feared, which also helped calm what might’ve otherwise been frayed nerves given ongoing banking stress, incessant recession banter and debt ceiling brinksmanship.

Note that more than three quarters of S&P 500 constituents who’ve reported beat earnings, and nearly the same percentage beat on the top-line. Those are better stats than Q4 reporting season, although obviously the bar was lower.

The correlation “crunch” is a vol-suppressant and currently, it’s working in tandem with a variety of other dynamics to create Charlie’s “manna from heaven” backdrop.

Index implied “was offered again” to start the week, he said, flagging large overwriting flows in singles and noting that institutions “have pivoted back into short vol trades to exploit the recent profitability of selling these convex options.” The simple charts below give you a sense of what kind of year it’s been for vol sellers versus long vol.

McElligott pointed to the resumption of positive profitability for short vol strats over recent sessions (green box on the right-hand chart) against “absolute bleeder” long vol (red arrow on the left-hand chart).

It’s the same picture (pretty much) for buying versus selling SPX daily 25d, strangles, straddles, etc., and it’s also working when implemented systematically.

That’s the backdrop for the correlation crunch. That is: Dispersion from the earnings season “winners versus losers” environment serves to tamp down vol too, which helps vol-selling strats, which are then emboldened to sell more vol, and so on.

Closing the loop, Charlie wrote that “all this short vol has dealers back sitting comfortably long gamma in SPX/SPY and QQQ, helping compress daily trading ranges” through dealer hedging flows. Of course, compressed daily ranges are conducive to vol-selling too.

“Manna from heaven” indeed.