Insights

Insights

Insights showcases topical observations from Qi. Pure signals highlighting where assets are rich or cheap versus macro. Or roadmaps to help provide the most efficient way to express any trade. Flags, in real time, highlighting changes in factor leadership or regime shifts.

See below for articles and analysis.

31.05.2023

Have we arrived yet?

The S&P500 has been climbing the wall of worry since the SVB collapse – it has shrugged off regional bank failures, commercial real estate worries, an inevitable recession that seemingly never comes, weak China data, the lack of market breadth and crowdedness in the same ideas and then risks around the debt ceiling.

However, with the S&P500 threatening to breach its trading range, we should note the following: the dollar has started to strengthen as the priced rate cuts are unwound, the curve has resumed its bear flattening from its already inverted state, long-end real yields have risen and rate vol has moved higher. Yet US equities led by the Nasdaq 100 have made further gains over May.

As a point of reference, the S&P500 earnings yield less 10yr bond yield gap currently stands at 1.8% - the lowest since summer 2007. The level of the equity risk premium does not seem to recognise any risks.

26.05.2023

Bullet proof

It's tough to argue with the superlatives surrounding Nvidia. The generative AI story does have the feel of a once-in-a-generation secular shift and the equity market will clearly be focused on picking the winners.

But is is worth checking in on the macro perspective and, in particular, the message from the bond market which has undergone a fairly sharp re-pricing. It's yet to embrace higher-for-longer as a theme for 2024, but the rate cuts priced over H2'23 have been removed.

The charts below show some of the macro inputs in our equity models in z-score terms, i.e. all shown in standard deviations from long term trend.

First up, 10y US real yields. The banking crisis saw real yields fall but, in the last few weeks the move higher in bond yields has taken them almost one standard deviation above trend.

Simone Mascellari Xnn42Lsnv28 Unsplash Copy

25.05.2023

Irrational Complacency? Watch Europe

The Qi Vol Indicator now stands at 23.4, well above the threshold of 20 which historically has acted as a red flag for a risk off move in equity markets.

In "Caution warranted" we detailed how our indicator can lead markets and this week VIX has indeed risen from 16 to 20.

Sovereign CDS and US Treasury bills are displaying signs of stress, but overall the striking feature is that financial markets do not appear to be unduly concerned about the US debt ceiling impasse. That has prompted talk that the irrational exuberance of the 1990s has been replaced by irrational complacency.

Cue hundreds of sell-side research reports using 2011 as a template. For asset allocators looking to identify which of their holdings are most vulnerable, or looking for cheap protection trades you can use historical precedents.

But you can also Qi's AI framework to highlight which assets are currently most sensitive to measures of risk appetite like VIX or the gold/silver ratio.

Premium content, for a full analysis sign up to a month of insights

22.05.2023

Caution warranted

The Qi Vol Indicator has risen sharply and now stands at 18.31.

Historically when the one month change in our Vol Indicator is greater than 20, markets have been vulnerable to a volatility event and "risk off" move.

The chart below shows our Vol Indicator versus VIX. There have been some false signals but there are numerous occasions when a spike in the Qi Vol Indicator has acted as an early warning for a big volatility event - "Volmageddon", the 2018 Powell 'policy error', Covid lockdowns etc

17.05.2023

Growth vs Value, Chinese style

Investors love tech, hate the banks.

Such is the perceived wisdom amongst US equity investors. In China the opposite is true.

Tech shares have yet to recover from Beijing's regulatory backlash. Moreover, since the confirmation of Xi's third term, there has been a sense that the current political climate is one that favours State Owned Enterprises rather than private sector tech disruptors.

That could help explain why CXSE - the Wisdom Tree ETF that gives exposure to Chinese stocks but excludes SOEs - is cheap on Qi.

Premium content, for a full analysis sign up to a month of insights

15.05.2023

Macro > AI

The NASDAQ is back in a macro regime. Qi model confidence is back above our 65% threshold for the first time in 5 months.

Understanding macro was critical for US tech stocks for most of 2022 but the regime changed in October and by January model confidence fell as low as 28% - US technology was more a function of the hype around generative AI than macro fundamentals.

09.05.2023

Go East!

After strong Q1 GDP numbers, more recent Chinese economic data have underwhelmed. The great 2023 re-opening trade has not delivered for international investors.

To be fair, maybe it's simply changed shape. Buying commodities and resource stocks may not have worked, but buying European luxury goods has.

Alternatively, maybe the average Western investor needs to take a more nuanced view of the opportunities in Asia. Yes the size of the Chinese economy dominates the region but there are individual stories unfolding.

Consider the chart below which shows Qi's macro-warranted model value for a number of ETFs tracking Asian equity indices.

Premium content, for a full analysis sign up to a month of insights

04.05.2023

Is S&P500 multiple expansion now over?

Inflation is moderating alongside falling short-end rates pricing in rate cuts over H2.

• If the fixed income market is correct, a recession is on the horizon and this is a warning for stocks.

• If the fixed income market is wrong and data remains fine, interest rate expectations would need to move higher.

• Both of these paths would put downward pressure on equity multiples, putting greater onus on earnings growth to come through, which in turn makes for a low Sharpe market backdrop.

Chairman Powell this week pointed to the strength in labour markets with no recession a more likely scenario. He reiterated that “the process of getting inflation back down to 2 percent has a long way to go,” and did not expect cuts this year. He did not rule out a June hike but said they would be now be more data dependent.

His assessment would be more consistent with the second scenario above. If his assessment is wrong, it would be because the credit crunch is intensifying and the labour market is weakening. Both scenarios put pressure on the PE multiple.

This conclusion is consistent with the observation that the S&P 500 PE multiples had contracted 8 out of the last 10 episodes after the Fed’s last rate hike and subsequent first rate cut. At that late stage of the business cycle, any further gains came from earnings growth with market introspection on the appropriate PE multiple already looking forward to what is next. The higher the Misery (inflation plus unemployment rate), the larger the PE contraction

04.05.2023

Jay Powell is watching credit
- shouldn't you be too?

In the minutes of the March FOMC meeting, the Fed explicitly acknowledged that the banking crisis and subsequent tightening of credit conditions, was having the same effect as rate hikes.

In last night's press conference, Chair Powell effectively signalled the Fed were in watch-&-wait mode. And that a key feature of their new data dependency is to watch and assess the impact of tighter credit conditions.

The message is pretty unequivocal - watch credit. Next week's Fed Senior Loan Office Survey was already a hugely important data point. Even more so now.

But otherwise, how is an equity investor supposed to 1.) easily keep track of all the moving parts of the credit market, 2.) measure their impact on the stocks, sector, ETFs that they care about?

Qi's Optimise Trade Selection function.

Premium content, for a full analysis sign up to a month of insights

01.05.2023

Concentration risk

It is not new news that a handful of mega cap Tech stocks have driven the 2023 equity market rally. But the degree to which the broad equity market relies on these few companies is reaching historical levels.

The chart below shows the regular market cap weighted QQQ ETF versus its equal weighted counterpart QQEW. The ratio is approaching the highs recorded in q4'21 - the peak of the Covid lockdown tech rally.

31.05.2023

Have we arrived yet?

Ordinarily, if the investor mindset shifts to “higher rates for longer”, it would put downward pressure on equity multiples, placing greater onus on earnings growth, making for a poor Sharpe backdrop. Yet the excitement on AI has so far masked this concern at the index level.

In markets, the phrase travel and arrive is used once the wall of the worry has been climbed and seemingly good news is already discounted. What does the machine suggest? The S&P500 is well explained on both Qi’s short term and long term models at 74% and 85%, respectively. The model value average on both models is ~4100 which put current spot on the rich side. However, what is particularly notable is that the S&P500 Qi model value has flat-lined and edged lower since the 3rd week of May.

Qi is clear on what equities need to see in the current regime to keep grinding higher: For the S&P 500 - lower rate vol, a weaker dollar, strong GDP growth, stronger metals, a steeper 5s30s curve and tighter credit spreads – Goldilocks? And so far in May we have seen weaker metals, higher rate vol, flatter 5s30s and a stronger dollar.

A similar pattern has emerged for the Nasdaq 100. Model value has been treading water and to move higher we need to see lower rate vol, a weaker dollar, higher GDP growth and metals – the same as for the S&P500. Several commentators have pointed out how resilient the NDX has been in the face of higher 10yr real yields. According to Qi, real yields are not currently a major driver of the index. Rather, lower rate vol and a weaker dollar are. And it is to these drivers where NDX looks over-extended of late. Now there are also concerns the need for the government to rebuild its TGA could drain Federal bank reserves. With the Nasdaq 100 now back to the 61.8% retracement of its 2021-22 sell-off, there is little room for error.

Have we arrived yet?

26.05.2023

Bullet proof

We see the same profile with the yield curve. After a sustained period of curve inversion, hopes of Fed rate cuts in the aftermath of SVB etc sharply re-steepened the yield curve. On Qi and in round numbers, the 5s30s curve moved from 2 standard deviations below trend to 2 standard deviations above.

For equity managers, the message is the inverted yield curve spoke to recession fears. The re-steepening raised hopes of a dovish Fed pivot. But now the bond market is partially unwinding those hopes.

Finally rate volatility where Qi employs swaption vol rather than the more widely watched MOVE index. The move is not as aggressive but it has just poked its head back above trend.

US equities in general, and tech in particular, want low rate vol and steeper yield curves. They want an easy money policy stance from the Fed.

Qi's NASDAQ model, which has 81% confidence, has risen 6.7% in the last month driven primarily by those two factors. But macro momentum is waning. Over the last week macro-warranted model value is up just +0.2% and those two factors have flipped from tailwind to headwind.

Hopes of a dovish Fed pivot are starting to be priced out. Watch Qi model value to see if this trend gathers pace and how it impacts equities.

The likes of Nvidia with the AI story may prove more immune to macro headwinds. Will that be true for all?

22.05.2023

Caution warranted

The full methodology for our Vol Indicator can be found here but in essence it's a way to measure when financial markets have become divorced from macro fundamentals.

Put another way, it is when price action is being driven by positioning, sentiment, geopolitics and other factors.

These drivers are inherently more volatile relative to macro variables. Hence sharp falls in macro explanatory power / sharp rises in these other conditions, can equate to uncertain trading conditions.

In investment terms it means it's time to think about playing defence.

And right now our model is flashing an amber warning light. A move over 20 would see amber turn to red.

15.05.2023

Macro > AI

The AI buzz is unlikely to go away. It has the potential to be a genuine game changer and investors will always be searching for the winners and losers.

But now investors need to be aware that it is no longer the only game in town.

What does the new regime look like?

Most financial commentary will argue that low bond yields are the primary driver of Growth plays. Qi largely agrees with this but with an important nuance.

It is not the level of 10y yields. Measuring the independent patterns of association shows the NASDAQ is currently completely insensitive to real rates.

Instead it is rate volatility and the shape of the yield curve that matter more.

Rate volatility is the single biggest driver accounting for around a quarter of the model's explanatory power. Qi employs swaption vol rather than bond vol but basically the fall in the MOVE is a big positive for tech stocks.

Similarly the shape of the 5s30s yield curve has become the biggest positive driver. A steeper curve is consistent with a NASDAQ rally.

Model value has rise strongly in the last month, driven primarily by these two factors.

The other big theme in this new regime is a desire for reflation. NASDAQ wants stronger commodities, tracking GDP growth and rising inflation expectations.

The attribution chat above shows the fall in these factors recently has been a headwind for macro-warranted model value. But, thus far, the move in the bond market has more than offset them.

What about valuation?

NDX screens as 1.1 standard deviations (6.4%) rich to macro fair value. The buzz around AI means a lot of good news is priced in. But critically model value is trending higher. It has risen 1.67% in the last month. Macro momentum is improving for US technology.

The bottom line is Qi would not portray current levels as an attractive entry point. But to turn outright bearish would require the red line above to roll over. Given Qi identifies the key drivers we are now forewarned on potential risk scenarios.

* a spike in rate vol - US debt ceiling impasse? - would be a clear bearish catalyst.

* ditto deflation and renewed yield curve flattening

Finally, what about risk aversion and the argument mega cap tech stocks are safe haven assets? Does that negate the risks above?

On current patterns, the NASDAQ has very little sensitivity to VIX. That might provide some relief in a 'risk off' move. But risk aversion is not (yet) a positive driver. It is, however, for Apple and Meta and given their importance this will require close monitoring.

Net-net, keep a close eye on Qi model value which will aggregate all these crosswinds into a single snapshot of overall macro momentum.

04.05.2023

Is S&P500 multiple expansion now over?

This should also be considered in light of the fact that the SPX 12mth fwd PE is trading close to post GFC highs and the S&P 500 equity risk premium close to post GFC lows.

On earnings, the surprising aspect of this earnings season was the ability of companies to pass on higher costs and protect their margins. On a medium term basis, one would not think that could last with falling CPI putting pressure on nominal top-lines alongside higher labour costs.

After the last hike in June 2006 we had to wait over 14mths for first rate cut in September 2007 – the backdrop was different then with earnings growth over that period exceptionally strong.

What does Qi show? SPX model value has been flatlining over the last month. It wants stronger GDP growth, tighter credit, lower rate vol and a weaker dollar.

With a focus on credit conditions, the senior loan officer’s survey is released on 8th May. The current US mortgage spread to 30yr yields is already indicating conditions moved tighter.

Bottom-line, the risk-reward suggests there are good reasons to respect the top of the current SPX range.

01.05.2023

Concentration risk

On Qi there is a striking difference between the two ETFs. Both in terms of the importance of macro, and their valuations.

QQQ remains just below our threshold for a macro regime. No signal can therefore be generated but it sits 1.4 standard deviations (8.1%) rich to model.

QQEW has 80% model confidence. It is in a strong macro regime. It is also rich but the Valuation Gap is modest; 'just' 0.5 std dev (2.5%).

The macro regimes are identical. Tech stocks want a Goldilocks mix of reflation, easy financial conditions and healthy risk appetite.

In short, the mega cap FAANGs are rich and idiosyncratic plays. But broader US technology stocks are a macro play, and are largely behaving as they should given current macro conditions.

Put another way, the FAANGs are responsible for lower macro model confidence and rich valuations. Consider the following stats:

Meta - macro model confidence of 57%; the stock is 2 standard deviations rich to model.
Apple - 28% model confidence, 1.6 std dev rich.
Amazon - macro explains just 20% of the variance of AMZN. The stock sits 1 std dev above model value.
Google - 37% and 1.6 std dev rich
Microsoft - 51% and a FVG of +2.3 std dev

Mega cap Tech is marching to a different tune. Most likely, the hype around generative AI has become more important than macro fundamentals.

Even in a week that contains ISM, Payrolls and a Fed meeting it is not hyperbole to say Apple's earnings on Thursday are potentially the biggest focus for equity markets. It remains the biggest company in both the S&P500 and NASDAQ.

If Apple can beat consensus expectations then the odds favour a continuation of the rally; maybe even a breakout of the mind-numbing range of recent months.

That will frustrate the bears, especially if the elasticity of mega cap outperformance has stretched as far as it can, meaning the broader market enjoys a bout of catch up. The bear camp will be hoping disappointing earnings are the catalyst for mega caps to catch down.

Qi's QQQ vs. QQEW Long Term model is not in regime. The ST model very much is (94% confidence) and suggests the market is simply tracking macro conditions.

12 3 4 ›»