The rebuilding of positioning across broad equities amid the S&P’s trek into bull market territory “is not a drill.”

So said Nomura’s Charlie McElligott on Monday, in his first note back from a client trip to Asia.

It’s obvious, he remarked, that the rally has moved beyond the simple unwind of debt-ceiling hedges. Now, some PMs are engaged in a “classic chase,” Charlie said, “where they start coming for anything left behind.” Note that small-caps (i.e., cyclical value) were bid into the rally, as the extreme “big-tech-over-everything” dynamic suddenly reversed+.

These last several sessions have evidenced a “capitulatory ‘stop-in’ for funds who simply have not had the positioning on, and have been forced to grab into exposure to play for a crash-up,” McElligott wrote. He enumerated a list of trades which speak to the panic grab in left-for-dead cyclicality (e.g., upside in ETFs linked to small-caps, emerging market equities, high yield credit and financials).

Do note the knock-on effect of the rotation: It’s a momentum reversal, and that means new local lows for correlation. In turn, that compresses realized vol, which was already grinding inexorably lower.

There’s another “vol bleeder” out there, Charlie noted. On Monday morning, a Bloomberg blogger mentioned the 4320 call strike for June expiry while editorializing around a position squeeze. McElligott subsequently noted that “dealers are long beaucoup gamma from the call component of the trade at the SPX 4320 line, which can then act to pin us / compress daily trading ranges with a ton of ‘gamma gravity’ there each passing day as we approach end-of-month.”

Spot could get pulled up to that level, and although OpEx will see “a ton” of gamma and delta roll off (opening the door to de-risking), Charlie said there will likely still be “plenty of energy for [a] further melt-up” given ongoing concerns that the 5% you’re getting in cash isn’t sufficient to compensate for the risk of missing the boat as stocks run away higher “with less than six months to make your year.” I’ve said it before and I’ll say it again for the casual readers among you: Underperformance risk is a real thing.

Coming full circle to the real deal (if you will) positioning rebuild mentioned here at the outset, McElligott put some numbers to it. “Cumulative options delta is 100%ile in our data history at $759 billion,” he wrote.

The vol control re-allocation is now near $150 billion over the past six months, a 95%ile six-month change on Nomura’s data, while CTA signals for US equities (including small-caps) are all “100% Long.”

The risk (for the Fed) is always the same. Charlie drove it home. “A further equities crash-up at the start of July and [any] concurrent ‘positive wealth effect’ [would] enhance the risk of another ‘Animal Spirits 2.0’ data re-acceleration,” he said, suggesting that could be especially perilous in the current environment given the distinct possibility that r-star is now higher than the Fed is willing to concede.