Why were US equities able to pull back? Put differently: Why was the door open to a drawdown following a prolonged period of range compression into the grinding summer melt-up?

Well, dealers’ short gamma positioning was a factor, and when you fold in VIXpery and OpEx, the conditions were in place for a downdraft aided and abetted by so-called “accelerant flows” from dealer hedging (which exacerbated directional price action) and systematic strat deleveraging.

According to Nomura’s Charlie McElligott, CTAs and vol control sold, deleveraged and otherwise de-allocated to the tune of $47 billion over the past two weeks, with the lion’s share coming from trend-following strats. The delta purge, meanwhile, was $339 billion across US shares (index and ETFs).

But as the weekend neared, vol-sellers saw an opportunity and downside hedges were monetized on the assumption that, as Charlie put it, “Friday marked the local lows and/or short-term bottom for equities.” With Nvidia results looming, “consensus among discretionary traders for this week seems to be a set-up where folks are playing for a bounce in stocks,” he said.

Crucially, additional downside probably needs to materialize soon, otherwise the pullback window mentioned above will close — and reopening it will require a macro catalyst.

“Anytime you get UX1 moving up five vols in the course of five days, vol needs to be fed with movement in order to be sustained,” McElligott reminded market participants. Otherwise, it’ll “mean-revert under the weight of its own expectations.”

The simple figure above illustrates the point.

Friday’s high print for VIX futures was 19.6. The implied daily change was 1.2%, but when the dust settled, stocks were unchanged. That, Charlie remarked, “is an absolutely brutal realized vol bleeder.”