Is the stock pullback over?

I doubt it, and now that you mention it, I doubt the stumble over the last two months counts as a proper “pullback.” US equities came into this week down all of ~4% from all-time highs, not exactly a disaster for a benchmark that’s up — checks notes — more than 170% from the pandemic crash lows.

But stocks are on track for a second straight monthly loss which would count as the “longest” losing “streak” (scare quotes everywhere) since October of 2023, when a term premium-driven bond selloff likewise rattled risk sentiment.

If you’re wondering how much “the machines” sold over the last several weeks — i.e., since systematic exposure peaked in December — the answer is that it depends on who you mean by “machines.” If we’re talking the vol control universe (a key systematic investor cohort), the figure’s somewhere on the order of $92 billion. That’s according to Nomura’s Charlie McElligott, who tallied up estimated futures selling from the vol-targeting crowd.

The figure on the left’s a reminder: Vol control exposure tends to be “escalator up, elevator down.” Exposure gets dialed higher into grinding melt-ups — which typically see realized vol trundle lower into a compressed distribution of daily spot outcomes — only to get “shocked” lower in big index drawdowns.

Vol control’s implied equity allocation on Nomura’s estimates was 100%ile on a three-year lookback headed into the December FOMC meeting, when the Fed’s “hawkish cut” triggered a vol event. Now, less than a month later, that exposure’s just 40%ile.

“As a core tenet of my worldview, it’s prolonged periods of sustained low volatility which sow the seeds for pullbacks and accidents,” McElligott said. “Low vol environments [are] met with VRP flows which stuff dealers on gamma and pin realized volatility further, allowing for ‘positioning excess’ via leverage accumulation and carry crowding, which can then see a bout of profit-taking tip over into a risk management exercise.”