Nomura's Charlie McElligott puts it all in perspective

Investors are scrambling for upside exposure.

Many investors were caught flat-footed when stocks suddenly jerked higher late last month, as a dramatic July momentum unwind ended with a hint of optimism.

Over the past two weeks, the mad scramble for upside exposure in the U.S. equities market has been a sight to behold, according to Nomura's Charlie McElligott.

"It's been comedy to watch," McElligott said, in reference to the market's latest abrupt change of heart.

After weeks of leaking lower, bullish call options were suddenly bid to the moon, McElligott noted. On Aug. 4, trading volume in S&P 500 SPX call options topped 4 million in a day for the first time, data from Cboe Global Markets showed, as demand for calls surged during a typically quiet period for financial markets.

Partly as a result, realized volatility on "up" days for the S&P 500 and Nasdaq-100 NDX has dramatically eclipsed volatility on "down" days so far this month. In the span of five trading days through Friday, the indexes had tallied a couple of daily moves of 1% or greater, compared with a few notably shallow pullbacks.

This has caused the ratio of realized volatility on up days to down days to reach the highest level on a calendar-month basis for both indexes since at least 1986, McElligott said.

To be sure, it is still early in the month, and McElligott expects this figure to normalize as August continues on - unless investors continue to pile into bullish bets. That didn't appear to be the case so far this week: Upward momentum was looking somewhat more challenged on Monday, with major U.S. indexes sitting on modest losses ahead of the closing bell, as Treasury yields BX:TMUBMUSD10Y pushed higher.

The Dow Jones Industrial Average DJIA, S&P 500 and Nasdaq Composite COMP on Friday tallied their strongest weekly showings since April.

Realized volatility involves measuring how volatile stocks have actually been on a day-to-day basis, while implied volatility measures how volatile investors expect stocks to be over a given period based on trading in options markets. In the U.S., the most popular gauge of implied volatility is the Cboe Volatility Index $(CBOE)$, or VIX, which aims to measure how volatile investors expect the S&P 500 to be over roughly the next month.

The VIX has remained subdued, although investors have on occasion seen a return to what McElligott has described as a "spot-up, vol-up" dynamic, which is often seen when investors are heavily buying calls to try and keep abreast of the market.

July's selloff resulted in the worst month for the momentum trade since 2000, according to one measure - but wild swings beneath the surface barely registered at the index level. The S&P 500 finished July only marginally lower, and quickly returned to record territory as the calendar flipped to August.

In retrospect, there were signs that the market was headed for an abrupt turn. Late last month, investment banks including HSBC and Morgan Stanley started sharing research showing that the selling in semiconductors and other hot AI-related names was starting to look overdone.

-Joseph Adinolfi