The S&P was 5700 and change on October 31. It’s nearly 6100 now. Not too bad for five weeks’ work.

What happened? Well, a US election for one thing, and the restoration to power of a “business-friendly” president. That stirred up the “animal spirits.”

Lest we should forget in our daily quest to explain market moves by way of “vibes,” there are actual flows behind the melt-up, and no one’s better at documenting those flows than Nomura’s Charlie McElligott.

Headed into the election, Charlie suggested US shares would move higher once the event risk cleared. The market was over-hedged on the downside and under-exposed to the right-tail, setting the stage for the usual melt-up sequencing. Long story short, he was right.

In his latest, McElligott detailed the process through which the resumption of systematic vol-selling set up and facilitated a post-election melt-up which now looks poised to bullishly conspire with a favorable seasonal and sundry acronyms (e.g., “FOMO” and “TINA” from the US-over-RoW consensus) to perpetuate the rally.

“[The] resumption of heady VRP flows [is] filling-in dealers with massive long gamma, which then insulates markets from large swings while funds are forced to reallocate into policy visibility, further enabling a constructive and grinding equities rally, boosted by the invisible hand of vol control-buying, as said gamma stuffing compresses realized vol and creates a mechanical bid under the market into year-end,” he wrote.

The figures below (click to enlarge) tell the story, figuratively and literally through Charlie’s annotations.

The two AUM charts on the upper-left give you a sense of how AUM dedicated to option-selling strategies has expanded dramatically. The figure on the upper-right shows you the context for dealers’ long gamma position. The charts on the bottom show (and describe) the impact on realized vol and the read-across for equity-buying from target vol funds.

That dynamic’s behind the steady grind higher for spot, and as spot goes higher, the angst among discretionary investors without enough exposure to the melt-up only grows. That angst eventually manifests as catch-up buying, pushing stocks higher still. Once retail notices, it’s off to the proverbial races.

“The discretionary community who under-captured the rally due to ‘too-low nets’ then has to buy the highs, which then too increasingly stokes speculative FOMO-chasing from retail,” Charlie went on.

And how does retail play this? Through call-buying for one thing, but also through leveraged ETFs, which are gathering assets, creating very large EOD re-balancing needs, as shown (and quantified) above.

So, what now? “WEN LAMBO?” to quote the crypto crowd. Right now, if you’re in Bitcoin, which hit $100,000 late Wednesday, but that’s another story.

“WEN MOON” for stocks? Perhaps soon enough. Because as McElligott pointed out, a lot of the long gamma insulation’s set to drop off, freeing equities to move around a little more. If any such movement’s to the upside, and spot makes it into a smattering of upside call strikes dealers are short to clients, well then… zoom!

The figure above (and more specifically Charlie’s annotations) shows and tells you how this could work. “There are building concerns about the rally hitting escape velocity,” he wrote, in the same note, citing call-buying at 6150 SPX up to 6500.

Of course, when melt-ups morph into outright crash-ups (as exemplified by “too much” interest in the call wing), it’s time to get worried, or at least cautious. “As markets then gamma squeeze with the call-buying via dealer hedging pushing said calls deeper ITM and higher strike buying in a virtuous feedback loop, even just a modest profit-taking can waterfall into a larger reversal shock, with markets then susceptible to ‘collaps[ing] under the weight of their own (prior) delta,'” McElligott wrote.

Don’t worry, though. We’re probably not there yet. As Charlie put it, referencing relatively middling positioning among key investor cohorts, “I want to see market exposures get much longer first, i.e. systematic allocations to equities > 90%ile and/or hedge fund long/short nets > 90%ile.”