01.03.2023
Amber flag for risk appetite
The Qi Vol Indicator has risen to 15.3. Historically, a one month rise of 20 points plus has provided investors with an early warning that some kind of volatility shock may be imminent.
Increases in the mid teens are not enough for a signal. But they do put us on alert.
It has had some false dawns, but eye-balling the chart below you can see there have been several occasions when the blue line spiked in advance of VIX itself.
Increases in the mid teens are not enough for a signal. But they do put us on alert.
It has had some false dawns, but eye-balling the chart below you can see there have been several occasions when the blue line spiked in advance of VIX itself.
They include:
- “Volmageddon” in early 2018 was pre-empted by several weeks.
- The Powell policy error in late 2018 / early 2019 was again anticipated.
- Covid & lockdowns. US equities were making new highs in Jan/Feb 2020 when Covid was perceived to be another Asian epidemic rather than a global pandemic. Qi was warning that macro fundamentals were not driving the rally & that risk levels should be adjusted.
- 2022 bear market. Once again, the sharp loss of macro’s ability to explain price action pre-empted the move in equity markets.
This time is different. The four most dangerous words in investing.
However, it is worth noting that this time around the move in model confidence comes from a higher starting point. Most of the Short Term models that constitute the Vol Indicator were tracking at 90% plus over January and February.
That's why the blue line is so low in the most recent part of the chart above.
To that extent, it may suggest we need to see a more sustained move higher, i.e. the Vol Indicator needs to increase by 30 or 40 points over the month rather than the usual 20.
Remember the core hypothesis* underpinning the Vol Indicator is that macro is inherently a more stable regime for markets than periods when positioning, deleveraging, sentiment shifts or geopolitics are driving price action. While model confidence is over 65%, macro is still the prevailing regime.
Finally, it is worth noting which components are responsible for the latest increase in the Indicator. The two biggest moves come from:
However, it is worth noting that this time around the move in model confidence comes from a higher starting point. Most of the Short Term models that constitute the Vol Indicator were tracking at 90% plus over January and February.
That's why the blue line is so low in the most recent part of the chart above.
To that extent, it may suggest we need to see a more sustained move higher, i.e. the Vol Indicator needs to increase by 30 or 40 points over the month rather than the usual 20.
Remember the core hypothesis* underpinning the Vol Indicator is that macro is inherently a more stable regime for markets than periods when positioning, deleveraging, sentiment shifts or geopolitics are driving price action. While model confidence is over 65%, macro is still the prevailing regime.
Finally, it is worth noting which components are responsible for the latest increase in the Indicator. The two biggest moves come from:
- ST Euro Stoxx 600 model confidence has fallen from 95% on Feb 1st to 66% today.
- ST EURUSD model confidence has fallen from 95% to 73% over the same period.
The point being it looks like Europe is at the epicentre of this move. The European single currency and equity market is predominantly where the regime shift is taking place.
Given our observation that European equities and European High Yield credit (iTRAXX XOver) rank amongst the most vulnerable risky assets, this Vol Indicator is worth watching and would appear to have a strong EU flavour.
* the PDF download below has the White Paper which provides an initial introduction to our Vol Indicator.
Given our observation that European equities and European High Yield credit (iTRAXX XOver) rank amongst the most vulnerable risky assets, this Vol Indicator is worth watching and would appear to have a strong EU flavour.
* the PDF download below has the White Paper which provides an initial introduction to our Vol Indicator.
