Things better stay calm.

If you’re looking for a four-word summary of everything I’ve written here in recent months about the read-through of the grinding, low-vol stock melt-up for accumulated equity exposure across systematic strategies, there it is.

I’ve used the word “asymmetric” over and over again lately while describing the de-leveraging risk associated with that mountainous exposure — exposure which, to reiterate, is dictated by realized volatility levels. That exposure gets dialed up into receding realized vol, and past a point, there’s more to sell in the presence of a vol shock than there is to buy on a continuation of benign market conditions. That’s the asymmetry.

I’ll spell it out again. After a while — which is to say after a prolonged period during which equities meander higher on relatively contained daily moves — the projected, model-based sell impulse from vol-sensitive strategies in the presence of larger stock swings exceeds the projected, model-based buy impulse in a scenario where stocks continue to trade calmly. Again: That’s the asymmetry.

At a certain threshold (and this is where it gets potentially dicey), that projection forecasts selling from the vol control universe in virtually any scenario other than an unchanged market. That’s where we are now. More or less.

For example, today’s estimates from Nomura’s vol desk suggest that vol control would be a seller to the tune of around $90 billion in the event of a 3% market swoon. The projection shows the same strats would de-risk to a similar degree in the presence of a 3% market rally.

You can imagine what those projections might look like for more dramatic hypothetical one-day spot moves. But you don’t have to — imagine, I mean, because Nomura’s Charlie McElligott did the math. And he rolled up the impact of options dealer hedging flows and leveraged ETFs’ rebalancing needs to complete the picture, which looks like this:

The figure on the left is a bar chart visualization of the “Total” column from the table on the right.

Note the pink-highlighted section of Charlie’s annotation: When you roll up projected mechanical flows across various sources, you get a net sell impulse regardless in a “shock” scenario, where “shock” is defined as a one-day move of 3% or more in either direction.

The table shows you the extent to which the projected vol control sell impulse would be offset by other mechanical flows in a rally. In no scenario outside the +/- 3% spot move band do those flows fully make up for projected vol control selling.

In a hypothetical, outright crash (i.e., the -20% scenario), the sum total of the sell impulse from vol control de-risking, dealer hedging and leveraged ETF rebalancing equates to a near half-trillion dollar sell flow. (“Projected losses, the projected losses, Will.”)

McElligott summed it up on his way out the door to a marketing trip in Japan. “IF the ‘AI singularity’ goes wrong, or if any number of potential vol catalysts for that matter drive an old-school ‘Corr 1,’ risk-off move, there’s just so much mechanical deleveraging and exposure reduction sitting out there,” he said.

Things better stay calm. Have a nice day.