Is the stage set for a summer equity melt-up?

That’s the question implicitly posed in the latest dispatch from Nomura’s Charlie McElligott, who on Wednesday noted that heavy vol supply into a steeper term structure with very attractive premiums for options sellers is creating a favorable backdrop for a “grind higher.”

That’s particularly true given that earnings season should help keep correlation suffocated, incentivizing additional index vol-selling to fund longs in single-name vol, which remains elevated in tech and AI-adjacents.

“The index vol bleed has been ‘virtuous feedback looping’ underlying equities,” Charlie wrote. If you’re not fluent in McElligott, “virtuous feedback looping” is an action verb there.

What he means is that as vol recedes (and term structure steepens), it incentives more vol-selling, which in turn “stuffs” (to use Charlie’s lexicon) dealers on long gamma, thereby insulating spot equities from large close-to-close swings.

When the distribution of daily spot outcomes compresses, realized vol does too, which in turn triggers mechanical re-leveraging (“buying”) from vol-control strats. That’s the “virtuous loop.” The figures above illustrate the dynamic.

As alluded to above, you have to consider this in the context of earnings season, when index correlation tends to get “crunched” by offsetting moves at the individual stock level, as investors price diverging corporate fortunes.

The mirror image of short correlation is long dispersion. The current environment, characterized as it is by very high mega-tech, semi and AI individual-name vol, is a veritable paradise for the dispersion trade: 0%ile correlation keeps the funding leg stable while 100%ile relative vol (i.e., index- versus single-name) makes the profit potential very enticing.

The figures above, from McElligott, give you some context for what he described on Wednesday as “performance ‘manna from heaven’ for selling index vol to fund single-name long vol.”

Like everything else to do with modern market structure, there’s a self-fulfilling aspect to that: It’s just one more source of index vol supply.

At the same time, the US macro backdrop’s pretty supportive, where that means consecutive benign inflation prints (CPI and PPI) rule out a July rate hike, consumer spending’s bolstered by the wealth effect from record-high stock prices and the labor market’s still adding jobs, even as June payrolls were uneven.

“The usual red flags of over-positioning and excess leverage remain marginal at best for the time being, especially where the VIX options space remains super clean and all into the micro calm of earnings season,” McElligott went on. “Things feel pretty darn solid for more low-correlation, ‘grind higher’ in the next week or two.”