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The point is netting all these cross-currents out and you get the chart above. Macro-warranted fair value in red is flat-lining. This latest sell-off has overshot relative to fundamentals.

The Fair Value Gap is -1.7 standard deviations or 2.0%. That's a rare occurrence. USDCAD has only ever been in regime and this cheap to model 3x since 2009. That's a very small sample size but every time the FVG has closed by the market catching up to model.

At a minimum, USDCAD has overshot even relative to the hawkish BoC / dovish Fed narrative.

And, for anyone thinking this bullish risk environment lasts into quarter-end but is vulnerable thereafter, USDCAD offers you an attractive entry level for a "risk off" trade.

The result is a substantial Fair Value Gap - SPX is now more than one standard deviation rich on our models. That's 4.7% and very much towards the top end of the valuation gap range.

The picture is even more acute looking at technology. Macro-warranted fair value for the NASDAQ has actually fallen 0.9% in the last week.

That leaves the NASDAQ as 7.5% rich to model.

Away from Qi, positioning and sentiment indicators are generally consistent with a "melt up" scenario.

Having been short / underweight during all this AI-driven buzz, bears are being sucked in ahead of month / quarter / half year-end. FOMO is a powerful dynamic so stepping in front of it, especially around fixed reporting dates in the calendar, is tough.

But note these are strong models. Model confidence sits at 89% for SPX and NDX, and both are seeing R-Squared numbers grind higher. Macro is slowly becoming more influential.

This is not an immediate bearish call-to-arms. It is a warning that as we think about early July and the start of a new quarter, the risk-reward is starting to look a little skewed.

Aligning Qi model value with Qi's Fair Value Gap is going to be a critical indicator to monitor in the weeks ahead.

Looking at the chart we can see:

The good news is macro momentum is still positive. Qi macro-warranted model value continues to trend higher.

The book-ends are Apple where mode value is 'only' up 9.9% over the last month; through to Nvidia where, again over the last month, macro conditions have improved to the tune of 34.9% and Meta, up 32.6%.

The bad news is a fair degree of this good news is in the price. All screen as rich to macro conditions; most modestly so but this time the outliers are Amazon (1.7 std dev or 16.5% rich to model) and Google (+1.8 std dev, +13.5%).

AI will continue to dominate the headlines. Similarly, the success of the Pro Vision product launch is a huge issue for Apple.

Bottom up company fundamentals remain critical. But investors cannot afford to ignore the macro perspective.

Long positions in US mega cap tech stocks means you are running long global economic growth, short rate volatility and have an implicit yield curve steepening bias. Are those risks you're aware of and managing?

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?

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.

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.