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(Bloomberg) -- The S&P 500 Index’s controlled decline is reducing the odds of a wider market meltdown, according to Nomura Securities cross-asset strategist Charlie McElligott.
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The CBOE Volatility Index has risen about 10 points since late February as the S&P 500 sank 6%. However, the increase in volatility was gradual, rather than the sudden spike seen in August and December.
The latest choppiness has been accompanied by “appropriate mechanical de-allocation, deleveraging and rebalancing trades that remove accelerant flows which then contribute to crash conditions,” McElligott wrote in a note.
With systematic investors such as trend followers and volatility control funds reducing exposure in the pullback, “positioning cleanse is well underway from this particular unemotional sources of de-risking, and that is constructive,” McElligott added.
After rallying over 53% in the past two years, the US benchmark has dropped about 2% in 2025 on worries about rich technology valuations, slowing economic growth and a global trade war.
Still, McElligott said volatility could decline in the coming weeks in the absence of an idiosyncratic shock, based on indicators such as the S&P 500 volatility term structure, volatility of volatility and the call-and-put skew.
One area of concern for the strategist is leveraged hedge funds and exchange-traded funds, which are still showing “pod stress” as they ditch positions in last year’s winners.
“Nearly 80% of the assets under management remain focused in tech leadership and animal spirits,” he said, adding that it creates a negative feedback loop.
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