MW Markets are seeing a monster vibe shift, says Nomura strategist. Here's what could happen next.

By Barbara Kollmeyer

Demand for equity options betting on rising stocks is picking up

The S&P 500 SPX came within a few wispy hairs of a new all-time high on Wednesday, though early indications are for a weaker start on Thursday.

On the bullish side of things, our call of the day from respected Nomura strategist Charlie McElligott suggest a potential melt-up for markets is afoot.

McElligott is known for prescient calls, such as accurately predicting a post-U.S. election rally. More recently, he and his team nailed some reversals across what he viewed as too-crowded bullish U.S. dollar and bearish bond positions.

As for his fresh call, the strategist now talks about a "monster vibe shift'" that has spread from those macro trades to equities. He notes downside risk hedging via bearish put options has given way to enthusiasm for more bullish call options on stocks.

So the shifting around on those options could mean another rally could be brewing for stocks.

Also potentially putting more upward pressure on stocks are volatility-controlled funds, which McElligott expects will buy some $40 billion of S&P 500 futures, as prices and big swings in the market have calmed down in the past month.

Volatility-controlled funds try to limit impact of volatility on a portfolio, so will often buy more stocks when the market gets less jittery. Five-day realized volatility on the S&P 500 has gone from 22.2 to a low of 8.7, basically being squeezed south, he noted.

The repositioning has led to some investors pushing into Big Tech, AI and semiconductor themes, small-caps IWM and gold (GC00), he says.

McElligott does attach a warning to all this renewed enthusiasm. That is the chase by volatility-control funds and others could get wobbly and stand in the way of more gains, instead of markets steadily grinding higher, he says.

Read: Six out of seven conditions are met for a stock-market bubble, this strategist says.

The markets

Stock futures (ES00) (YM00) are pushing lower, led by technology (NQ00) , while the 10-year Treasury yield BX:TMUBMUSD10Y is shifting higher.

   Key asset performance                                                Last       5d      1m      YTD    1y 
   S&P 500                                                              6049.24    1.67%   0.15%   2.85%  24.25% 
   Nasdaq Composite                                                     19,756.78  3.50%   -0.04%  2.31%  28.62% 
   10-year Treasury                                                     4.573      -8.40   -1.60   -0.30  39.20 
   Gold                                                                 2772.8     1.84%   5.29%   5.06%  37.65% 
   Oil                                                                  75.96      -4.04%  8.25%   5.69%  0.80% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

Barron's Roundtable: Retirement Checklist: Saving, Spending, Security: Join us for conversations with experts on how to secure a nest egg in a pricey market, and how to estimate retirement healthcare costs.

The buzz

Weekly jobless claims are due at 8:30 a.m.

President Donald Trump will address the World Economic Forum in Davos remotely at 11 a.m.

Union Pacific $(UNP)$, Discover Financial Services $(DFS)$, Freeport-McMoRan $(FCX)$ and Air Products $(APD)$ are reporting this morning. Texas Instruments $(TXN)$ and Intuitive Surgical $(ISRG)$ results are due after the close.

Electronic Arts shares $(EA)$ tumbled after the videogame developer cut its outlook due to trouble for one its big game franchises.

The U.K. competition regulator said it would investigate Apple $(AAPL)$ and Google's $(GOOGL)$ mobile ecosystems.

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The chart

More fuel for stock gains? The above chart from Goldman Sachs tactical strategist Scott Rubner, shows how January is the single biggest month of the year for inflows into 401(k)s and 529 plans.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   AAPL    Apple 
   PLTR    Palantir Technologies 
   META    Meta Platforms 
   RGTI    Rigetti Computing 
   NFLX    Netflix 
   AMZN    Amazon.com 
   MSTR    MicroStrategy 

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-Barbara Kollmeyer

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January 23, 2025 06:45 ET (11:45 GMT)

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