25.04.2022
This time is different
Friday’s sell-off took the S&P500 to 1.85 sigma (6.1%) cheap to Qi’s model fair value. The index has only been in regime & this cheap to macro 3x before. Back-tests show this is a highly significant discount. One that, since 2009, has provided attractive entry levels to buy the dip. It worked effectively just a month ago in early March.
‘This time is different’ are supposedly the four most expensive words in the English language. But the chart below shows why a discretionary client of Qi would not pull the trigger on the current signal.
It shows S&P500 macro-warranted fair value over a 4mth (blue) & 12mth (red) look-back period; i.e. given the growth/inflation mix, overall financial conditions & levels of risk appetite where 'should' SPX trade. Both ST & LT models show macro conditions are deteriorating.
It shows S&P500 macro-warranted fair value over a 4mth (blue) & 12mth (red) look-back period; i.e. given the growth/inflation mix, overall financial conditions & levels of risk appetite where 'should' SPX trade. Both ST & LT models show macro conditions are deteriorating.
Between them risk aversion & corporate credit spreads account for almost half of model value. Higher VIX & wider High Yield spreads are driving macro fair value lower.
Moreover, the picture is compounded when we run the same chart for US High Yield. Macro fair value for HYG is making fresh lows as it accelerates lower on both ST & LT models.
The only consolation for US equities is that the current FVG suggests it has discounted some of this bad news already. HYG is also cheap to model but ‘only’ 0.9 sigma (2.2%).
Moreover, the picture is compounded when we run the same chart for US High Yield. Macro fair value for HYG is making fresh lows as it accelerates lower on both ST & LT models.
The only consolation for US equities is that the current FVG suggests it has discounted some of this bad news already. HYG is also cheap to model but ‘only’ 0.9 sigma (2.2%).
