Stocks are reluctant to hold a selloff. In fact, we’re back in a regime where selloffs (real ones) have gone missing.

Across the four-month equity rally which, as noted here, counts as the third-largest in a decade, there have been just three 1% down days.

By contrast, there were 11 (and very nearly 13) rallies of 1% or more.

Small wonder market participants are more worried about missing another move higher than a crash.

That psychology has fostered a distinct vol regime. I’ve been over it and over it, and I’ll probably go over it again some more: The well-founded fear of a melt-up has manifested in persistent demand for upside optionality and no interest in downside protection, particularly given the notion that the Fed “has the hedge on” for you.

On Thursday, Nomura’s Charlie McElligott (whose dailies are all you need when it comes to strategy), broke this down into six bullet points which I highlight below:

• Options skew is at extreme flats because the larger perceived risk from clients hasn’t been about downside crash, but instead…
• a sustained fear-of-tight-tail crash-up, that has made index call skew so absurdly high, creat[ing]…
• a positive spot / vol correlation dynamic as customers lunge into calls, oftentimes funded through put-selling on any nascent sign of spot weakness [hence] spot down, vol down, where…
• put-selling is generating absurdly smooth Sharpes which on a one-year lookback are even outpacing Sharpes on ‘Long Stocks’ as…
• we have returned to a 2021–like world of meme stock / crypto degeneracy and speculation, where “stocks only go up” and…
• equities spot index then simply cannot sustain even a nascent pullback, as that vol is hammered-into by the massive vega supply from the enormous flows being generated out of VRP universe

I’d say I’m reasonably confident that most readers understand that interplay by now, but I’m actually not convinced, which is why I continue to bring it up. Those half dozen bullets explain a lot and they summarize what’s going on behind the proverbial curtain.

If you’re wondering how all of this could go wrong (or “wrong-way,” as Charlie would put it) one risk is the long/short space. “This type of incessant spot equities rally with index vol cratering has forced funds who can’t run any / enough nets into what is a de facto Momentum Long-Short positioning, increasing ‘unwind’ risk from crowding,” McElligott wrote, adding that persistently subdued index vol has naturally allowed “for more gross leverage deployment, hence, further deleveraging risk into a reversal catalyst.”