Cash is still sitting on the sidelines. Some funds are dipping into short positions on small caps, hoping for a breakdown that never comes. But the weight of the market keeps leaning higher, not lower. Pullbacks are short-lived, shallow, and get bought quickly. What they really do is draw in skeptics, only to squeeze them out and add fuel to the next leg up.
Positioning tells the story. In early 2025, equity allocation among active managers remains near cycle lows. Money market assets are still above $6 trillion. That kind of defensive posture does not match what the charts are saying. The S&P 500 keeps printing new weekly highs. Mega caps are dragging the indexes upward. Now even breadth is improving. The energy that usually fades is getting replaced.
But there is something else under the surface that matters more than sentiment or earnings. Volatility.
The short volatility trade has been flat for nearly a year. Compression kept building. That changed this week. A major proxy for short volatility exposure just broke out of a tight twelve-month range. Green candles now mark fresh twenty-week highs. This is not just a technical detail. It signals something deeper about positioning.
A breakout in short volatility trades tends to coincide with risk-on momentum. It implies suppressed volatility going forward, which historically correlates with rising equities. When volatility trends lower, institutions gain confidence in leveraging up. Retail follows. The market gets smoother and steadier. Melt-ups become more likely.
You can see the effect. Implied volatility has fallen below 13. The VVIX is back near 2021 levels. That is not a signal of fear. It is a confirmation of control. Options flow reflects the same tone. Skew has collapsed. Traders are no longer paying up for downside protection. That is typically a late stage development. It does not mark the end. It marks the start of a blowoff phase.
The setup is there for a market that grinds higher while shorts get chewed alive. There is still too much money betting on a crash that never comes. Shorting low liquidity names and small caps creates momentary pressure. It often ends in a reflexive unwind. Volatility spikes get sold. Dips get erased. Every bearish position added now is fuel for higher prices later.
Pullbacks will happen. They always do. But the structure suggests they will be shallow. When volatility is low, mean reversion strategies dominate. Dips become magnets, not exits. That is where the danger lies for anyone still fighting the tape.