Are we witnessing a “blow-off top” in equities?

To answer that, we have to define the term. You won’t find it in any dictionary. Like “melt-up,” it’s a colloquialism. There’s no set, formal definition. But there are traits, signposts and so on. If you ask Nomura’s Charlie McElligott, the post-Nvidia earnings trade (on February 22) might’ve evinced some key attributes.

He pointed specifically to the combination of a big rally and simultaneous skew-flattening. Recall that there was scant evidence post-Nvidia of an inclination to monetize upside or hedge the risk of a hangover. Instead, Charlie noted, “we only saw” more grabbing into trades consistent with investors’ well-documented fear of a never-ending melt-up.

If we assume Nvidia’s record-shattering $275 billion value creation event was indeed indicative of a “blow-off top,” it’s logical to ask what tends to happen in the weeks and months following such episodes. The table below, created by Nomura’s Joanna Wang, answers that question in the context of days like February 22.

As noted by the chart header, the table looks at SPX returns into an ostensible blow-off top, defined as a big equity rally in conjunction with extreme skew flattening.

Going by that analysis, the current rally could peak some time in the next month. The median one-month return in prior such episodes was better than 3% with a 60% hit rate.

That’s the good news. But, as Charlie gently noted, things get “a bit more treacherous” looking out six months, while the 12-month forward “is straight grim,” as he put it, adding that “there are a lot of ’00 / ’01 post-tech bubble dates” in the table, “with a splash of 2008 just for kicks.”