A Monster Vibe Shift in Markets: Insights from a Top Strategist

Demand for Bullish Equity Options Signals Renewed Optimism in Markets

The S&P 500 (SPX) narrowly missed hitting a new all-time high on Wednesday, though Thursday’s early indicators point to a softer start.

In a bullish turn, Nomura strategist Charlie McElligott suggests a potential “melt-up” could be underway. Known for his accurate market calls—including the post-election rally and recent reversals in crowded trades on the U.S. dollar and bonds—McElligott sees a notable shift in investor sentiment.

He highlights a transition from bearish put options used for downside hedging to increased interest in bullish call options on stocks. This shift in options trading could signal the early stages of another rally.

Another factor adding fuel to the bullish case is the activity of volatility-controlled funds. McElligott estimates these funds could deploy roughly $40 billion into S&P 500 futures, thanks to the recent calming of market swings. These funds, designed to reduce portfolio volatility, tend to increase equity exposure as market conditions stabilize. The S&P 500’s five-day realized volatility has fallen significantly, from 22.2 to 8.7, reflecting this trend.

This changing landscape has sparked renewed interest in growth sectors, including Big Tech, AI, semiconductors, small-cap stocks (IWM), and gold (GC00).

Despite the optimism, McElligott offers a word of caution. The aggressive buying by volatility-controlled funds and other investors may lead to market instability, potentially disrupting a steady upward trajectory and introducing more erratic price movements.

In summary, growing demand for equity call options and a decline in market volatility are driving a more bullish sentiment, but investors should remain vigilant for signs of volatility returning to the markets.