Remember the post-December FOMC vol shock and correlation spike?

If not, don’t fret. That was two weeks ago, after all, and many of you have probably done a lot of drinking since then.

To briefly recapitulate, the VIX, vol-of-vol and gauges of implied correlation spiked hard in the wake of the Fed’s new dot plot, which tipped just two cuts in 2025 versus the four conveyed by the September SEP.

As the simple figure shows, that session (December 18) was the second-worst day of an otherwise outstanding year for US shares, with the only worse session being August 5, when the Nikkei collapsed and vol staged a mind-bending surge, indicative of a fragile VIX options complex.

If you’re wondering how (or if) that day affected the market for the remainder of December, the answer is that although dip-buyers and vol-sellers appeared to quickly engage in the sessions following the Fed-driven fireworks, the legacy of that event might’ve contributed to a de-risking impulse from a vol control universe whose exposure to equities was maxed out.

“We had [a] brief but acute thematic reversal of the mega-cap tech leadership, which of course went hand-in-hand with a sharp spike in SPX Correlation, helping extremely sensitive vol squeeze off previously low absolute levels,” Nomura’s Charlie McElligott wrote, recapping the last two weeks of 2024 and citing “the crazy moves on December 18” in both equities and the VIX.

The “squeeze in SPX Index trailing realized vol alone set-off vol control de-allocation from recent equities exposure highs in massive form thereafter,” he went on.

The figures above (click to enlarge, as always) illustrate the point. On Nomura’s estimates, target vol sold nearly $71 billion over the past two weeks. Exposure there’s now middling, in the 51%ile on a three-year lookback.

So, what now? Well, vol control still has some de-allocating to do even in a relatively calm market (i.e., the math from the realized vol lookback dictates selling pressure over the first two weeks of 2025 from that cohort).

After that, though, and assuming stocks manage to settle into a reasonably contained daily range (i.e., +/- 0.5%), “there would be a lot of equities to buy” for target-vol “looking out on the one-month forward,” McElligott added, noting that “we’ve now cleared a huge chunk of [the] precariously long systematic exposure,” leaving positioning from those strats in “a much cleaner place.”

It’s a new year, which, as Charlie reminded market participants, means “new PNL and risk-budget [and] new willingness to allocate into high Sharpe, short vol strats.” That, in turn, suggests dealers could get stuffed with long gamma pretty quickly, insulating the market, compressing rVol and “allowing for exposure to be re-accumulated in the classic ‘virtuous cycle’ of modern market structure.”