Trivia time: How many daily SPX moves of +/- 1% have we seen since the index reclaimed record highs late in June?

As you’re probably aware, the answer’s “not many.” Just four, in fact.

I update the figure below regularly during prolonged periods of market calm. It plots the daily change on the benchmark with two trailing rVol lookbacks, 10-day and three-month.

This is self-evident, but a compressed daily spot range is synonymous with subdued realized vol. And the whole thing has a tendency to self-fulfill.

When vol’s suppressed, any expansions look like opportunities (in the same way that any dip, no matter how shallow, looks like an alpha opportunity during long equity melt-ups) and as such gets sold very quickly. “Sell the vol rip” is the flip side of “buy the equity dip.”

The longer that goes on, the more it begins to resemble a perpetual motion machine. It’s muscle memory. It’s Pavlov. If Sharpes on vol-selling are high, you sell vol. And that supply suppresses vol further. Around we go.

Have a look at the figure on the left, below, from Nomura’s Charlie McElligott. “The daily vol supply continues to stuff dealers on at-the-money gamma” which helps compress the distribution of outcomes in spot equities, he wrote, recapping familiar dynamics and noting that the dealer gamma imbalance is the longest so far this year.

When realized vol’s under pressure, it dictates mechanical re-risking across systematic strats, whose exposure to US equities now ranks in the 100%ile looking back to late-2022, as shown on the right, above.

That nosebleed exposure (systematics in equities) underscores both the impact of prolonged vol suppression and why it’s critical that we don’t see a sustained bout of market fireworks.

As discussed here on Tuesday, the 100%ile equity exposure ranking across systematics represents a highly asymmetric setup. Most of that dialed-up stock exposure is in target vol strats, which are now tipped as sellers in anything other than a flat market.

For now, dealers’ long gamma position is helping to prevent the sort of swings which could push up realized vol and tip over that systematic exposure. That’s the “pin”: When dealers are “stuffed” (to use McElligott’s lexicon) on at-the-money gamma, the associated hedging flows help insulate spot. Conceptually, dealers are buying weakness and selling strength, thereby limiting downside and speed-limiting upside. The result’s a market that doesn’t move around a lot. A “pinned” market.

But that gamma imbalance isn’t static. It depends on options positioning, and a portion of it rolls off at expiry. Some of it will be reestablished with new positions and so on, but the point is just that with systematic exposure now maxed out, and with a lot of that concentrated in strats which’ll be sellers in any scenario that sees the market snap out of its five-month stupor, we’re looking at a bit of a “dry kindling waiting on a match” situation.