The only thing to fear is the right-tail.
That’s the mindset markets have been forced to adopt, Nomura’s Charlie McElligott said Thursday, as US equities loitered near record highs amid speculation that the US and Iran are poised to finally ink an MOU reopening the Strait of Hormuz.
The deal, assuming it’s signed, will extend a brittle ceasefire for 60 days, a period during which Washington and Tehran will sort out the fate of 440.9 kilograms of near-bomb-grade enriched uranium. It’s a delicate task requiring level-headed leaders with steady hands. We have Donald Trump and the IRGC.
Aaaanyway, just 10 stocks are responsible for nearly 70% of the US equity rally from the war lows in late-March.
The figure above, from McElligott’s Thursday piece, shows you the breakdown. Hyper-scaler, semi, semi, Apple, hyper-scaler, semi, semi, semi, hyper-scaler.
Suffice to say this is a one-dimensional rally. As Charlie wrote, “many are really uncomfortable with equities ‘up here,'” particularly given the concentration in “bottleneck” themes.
Alas, you gotta “play along.” Because your career depends on it. There are, as McElligott put it, “existential performance” considerations, which just means you don’t want to be any more underweight sundry manifestations of the AI theme than you may have to be.
When I think about people fighting the AI rally, I’m reminded of Krusty explaining why he bet against the Harlem Globetrotters: “I thought the Generals were due!” (If you get it, you love it.)
The key charts from Charlie’s latest are below. They’ll be familiar to regular readers.
The figure in the upper-left corner shows relative demand for downside protection versus upside optionality on the semi ETF. In the upper-right corner you can see ATM vol for the product. The lower-left pane gives you a sense of interest in melt-up “protection” for semis (i.e., relative demand for OTM calls versus ATM) and the lower-right figure shows you interest in crash protection on chip names.
Together, those charts paint “the perfect picture of the stock market zeitgeist,” McElligott wrote, on the way to summarizing the spirit of the day: “The only tail we fear is the right-tail crash-up in the AI trade.” There’s no better way to visualize that vibe than extremes in semi ETF skew.
Editorializing further, Charlie reiterated that “investors were forced to performance-chase” over the last two months, and that meant grabbing “into upside optionality [while] puts utterly died.”
Low vol and low correlation at the index level belie a demonstrable “spot-up, vol-up” regime in the AI trade and mega-cap tech, McElligott went on. “All the vol is in the largest tech names,” he said.
