Don’t look now, but US equities are within shouting distance of record highs, on track for a 3.5% monthly gain to start 2025.

That’s quite a reversal of fortune. The new year was off to an inauspicious start thanks in no small part to Treasurys which couldn’t get out of their own way, trading heavy on fiscal concerns ahead of Donald Trump’s second inauguration.

Last week was a turning point, though. Stocks and bonds rallied together when the BLS said both wholesale and consumer price growth cooled in December. The figures were a veritable lifeline for the long-end, and the benign CPI release sparked a dovish turn for what had been a hawkishly-biased STIR space. Indeed, Nomura’s estimates show large CTA trend buy-to-cover flows across both bonds and STIRs, where short positioning was lopsided (i.e., “too” consensus).

That’s part and parcel of what Charlie McElligott on Wednesday called a “vibe shift.” It’s evident pretty much everywhere you look, including equity options where previously “stuck” skew and put skew testified to lingering angst and moribund call skew to the ostensibly long odds of a renewed melt-up. Both of those dynamics inflected in recent days, as illustrated below (click to enlarge as always).

The left and middle figures are indicative of waning demand for downside protection, and the chart on the right of renewed interest in upside, out-of-the-money optionality, which is to say exposure to the right-tail — a potential crash-up.

“The same monster ‘vibe shift’ from the macro trades has ‘realized’ in equities index vol, as skew and put skew on majors has been crunched, while upside has finally found a bid,” McElligott wrote.

At the same time, short-term realized vol (e.g., five-day) has collapsed by more than half, and one-month mechanically reset lower when the post-December FOMC selloff fell out of the sample (i.e., rolled out of the lookback).

The figures above document an all-too-familiar dynamic: When realized vol recedes, target-vol re-allocates on a lag. Put differently, falling rVol creates a latent bid for stocks.

“We estimate vol control funds were going to be buyers of $40 billion of S&P futures into today,” Charlie went on.

If you’re curious what typically happens following one-day, target-vol “buy” impulses of that magnitude, Nomura ran a backtest. Stocks generally drift sideways for a week, slip a bit out two weeks, then proceed to rally out three and six months.