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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.

07.02.2023

Creeping bears

* RETINA - Qi's trade idea generator - had a strong skew to being bullish US equities in January.

* at the margins, that's changing. There are still several bullish signals being generated. The new news is a growing number of bearish signals.

* most notably in Consumer Cyclicals, Communication Services and Financials.

The Qi treemap is a new feature available to clients upon request. Initially it is trained on US single stocks but, over time, this framework will be applied to European and Asian single stocks, currencies and more.

It captures all the signals from RETINA over a rolling one month period. Bullish signals are green, bearish signals in red. The deeper the red / green, the higher the conviction level in the signal using our 1-4 bar system of measuring signal strength.

The chart below shows the treemap from Jan 13th.

06.02.2023

Watch Utilities

The strong start to equities in 2023 has seen most people focus on the bounce in technology. Understandable when something like ARKK is up almost 40% YtD

But it is equally worth focusing on the other end of the spectrum. What's the story on the more defensive side of the equity market?

Inelastic demand plus bond-like characteristics make Utilities a classic defensive play.

Qi's Long Term model for XLU is not in regime but Short Term model confidence is high (89%) and stable.

There is no real valuation edge. XLU is slightly cheap (0.3 standard deviations, 1.3%) but that simply reflects it is slightly lagging the deterioration in actual macro conditions. Qi model value is -3.1% thus far in 2023.

But looking at Utilities relative to its peers the moves are far more dramatic.

The chart below shows XLU versus SPY.

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03.02.2023

An effective China re-opening play

* TongCheng Travel Holdings is an online travel agency that stands to benefit from the China re-opening story.

* Equity investors focused on company fundamentals don’t care for macro – it’s noise. But these are macro markets & ignoring it hurts performance.

* Qi enables managers to add a quick macro overlay as a sanity check at the end of their fundamental work.

* In this case, a quick & easy way to identify a potentially cheap entry level for a China re-opening trade.

TongCheng Travel Holdings (780 HK) is back being a macro trade.

The chart below shows Qi model confidence – how effective macro factors are at explaining price action in any asset.

30.01.2023

Fighting the Fed

A 25bp rate hike seems given. The bigger focus for this week's Fed meeting is the degree to which Powell pushes back against the early 2023 Goldilocks narrative.

Part of the strong start to the year comes from China's re-opening and hopes Europe will avoid a recession. But, from a US perspective, the dominant theme has been peak inflation and the hope it prompts a dovish pivot from the Fed.

Those hopes have fuelled a material easing in overall financial conditions. There are numerous versions of US Financial Conditions indices out there. Most include the S&P500 given the wealth effect that comes from rising equities.

That creates a clear loop.

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17.01.2023

ERP at cycle lows – earnings risk has to be seen to be believed

Growth expectations trump financial conditions concern

Risky assets have rallied globally as expectations on growth have risen relative to expectations on tighter financial conditions – Goldilocks has made a return.

In the US, inflation is falling and while economic data is moderating we have the lowest unemployment rate of this cycle with average hourly earnings well off the peak.

Europe has benefited from falling gas prices. While China re-opening is also supporting global growth expectations.

US equity risk premium back to 2005-06 period when VIX averaged mid-teens.

From their October lows, MSCI China has risen 52% and DAX 26%. In the US, small caps +15% and the S&P500 is back at its 200d MA. VIX has breached 20% and now below its 2022 lows.

The equity risk premium has continued to decline to new cycle lows and where we were during in 2005-06 when VIX averaged in mid-teens territory. Evidently, the market has been quick to make the assertion monetary policy indigestion is unlikely.

11.01.2023

EURUSD - a roadmap

“European stocks’ outperformance has fundamental underpinnings” – Bloomberg.
“Goldman Sachs no longer expects recession in euro zone in 2023” – Reuters.

And so it begins. Lower energy prices and China’s re-opening are two of the key factors cited in a host of articles suggesting the narrative around Europe is shifting. For many this leads to the conclusion that long EURUSD is the right call for early 2023.

09.01.2023

Earnings Season

Q4 earnings season starts this week and analysts have been cutting estimates. FactSet show that over the last 3 months, consensus expectations for Q4 have fallen 6.5%.

It's normal for analysts to cut numbers ahead of time - it lowers the bar, making beats easier to achieve - but the reductions over Q3 and Q4 2022 were larger than normal.

Interestingly, recession fears have been increasingly priced into earnings estimates at a time when Now-Casting shows US GDP growth tracking around 2.0% annualised.

From a macro perspective, one of history's most anticipated recessions still isn't apparent in the hard data.

Marrying top down and bottom up analysis is never easy. Fortunately, Qi can at least let investors know when each skill set is required.

05.01.2023

Tactical Trading

Model confidence is high on Qi's Short Term models, underpinning the importance of tactical trading in January. Don't get suckered into early year consensus views.

Macro matters and there's little valuation edge currently. 2023 is shaping up to be all about macro, again! And, thus far, US equity indices are behaving as they should.

Watching ST model value moves will be critical.

03.01.2023

The best European recession trade?

Looking across Qi, one of the biggest moves in model over year-end came in European Fixed Income. Model value for the European 2s10s yield curve flattened aggressively and now sits at -60bp. That’s versus -31bp one month ago.

The actual market did not follow suit to the same degree; hence a large Fair Value Gap has opened up. On Qi, 2s10s sits 30bp too steep relative to prevailing macro conditions. That’s an extreme.

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01.01.2023

Qi Macro Factor Glossary

Learn more about the Macro Factors

07.02.2023

Creeping bears

And then this is the treemap for today. More red signifying a growing number of bearish signals.

The chart below shows the number of signals as a percentage of the S&P500. Remember only single stock in a macro regime (model confidence > 65%) warrant a signal.

So, looking across the entire S&P500 during the October / November rally, bearish signals flat-lined at low levels, while bullish signals got into double digit territory.

During the January rally bearish signals were negligible while bullish signals ran in a 5-10% range.

Now, in February there's been a notable spike in the number of bearish signals the machine is firing out.

Where are those bearish signals coming from?

February has seen the largest number of bearish signals in Consumer Cyclicals in a year:

The machine has not been bearish on any Communications Services stocks since last summer. Until now.

There were only bullish signals on Financials between early December and late January. The first red bar appeared in the third week of Jan and they've been moving higher since.

Further methodology detail available but, in brief:

Stocks are mapped to their GICS Level 1 sectors. The size of the sector within the overall treemap simply reflects the number of single stocks in that sector. This could shift from number of stocks (volume) to market cap (price) if feedback warrants it.
RETINA signals are assigned a conviction level ranging from 1 (good) to 4 (super signal). These are derived via a blend of backtests, macro momentum (direction of model fair value) and price momentum (price trend).
Aside from the colour of box, there is additional info provided on each signal. Including open date and price, and current return.

This is a beta test of this new product. Upgraded functionality and greater model coverage will all follow in due course.

03.02.2023

An effective China re-opening play

Between Mar 2020 & January this year model confidence was below our 65% threshold - TongCheng was a micro play, i.e. it was all about idiosyncratic risks. It was business as usual for any stock picker focused exclusively on company fundamentals.

Now though the macro environment explains 72% of the variance in the stock price. Investors need to be aware of the macro influences on the stock.

In the chart below, the red line is Qi macro-warranted model value for TongCheng – where the stock ‘should’ trade given all the current macro info (includes economic fundamentals like GDP growth, inflation), measures of Financial Conditions (real yields, credit spreads) & risk appetite (VIX, EM VIX etc).

Having moved sideways for much of H2’22 macro conditions improved at the start of December. The move higher in the red line reflects China’s re-opening.

At first, the spot price embraced the idea of Chinese tourists hitting the road & the stock price rallied hard – more than macro. But recently it has pulled back.

GS have cut the stock from ‘buy’ to ‘neutral’. But their target price is HKD 20.50 (currently HKD 17.80). Qi says macro-warranted model value is close to the GS target – HKD 19.73.

A quick & easy way to identify a potentially cheap entry level for a China re-opening trade.

17.01.2023

ERP at cycle lows – earnings risk has to be seen to be believed

The market expects earnings expectations to trough this summer?

This leaves us with pondering the lagged effect of inflation and tighter financial conditions on corporate earnings. The rule of thumb is that stocks trough 6-9mths before earnings do.

If the market trough was October-22, the expectation is that earnings expectations will trough this summer.

12mth fwd EPS has seen so far a gradual 4% decline from its peak last summer.

This earnings season, companies have to guide this quarter for the year and historically the incentive has been to set the bar low enough so they can beat - the usual earnings playbook game.

Earnings season has only just commenced with the banks – corporate commentary will heat up over the next two weeks.

S&P500 LT model confidence has been falling (50%) reflecting this debate between hard / soft landing

On our LT model the S&P500 was cheap to model in mid-December but now back at model value.

On the LT model, the focus on economic growth peaked in December and has since drifted lower.

Financial conditions through USDCNH, credit spreads and Fed rate expectations are still dominant drivers for the Goldilocks view.

Tentative signs pockets of the equity market are moving somewhat ahead of macro-warranted valuations

Qi’s ST models have been exhibiting higher model confidence during this potential regime shift, with over-extensions more notable in consumer-centric sectors:

S&P500: ST model confidence is high at 86% - the index is at +0.8 sigma (+2.6% rich)
IWM: ST model confidence 67% at +1.5 sigma but also LT model confidence 73% and +0.6 sigma
XHB: ST model confidence 76%, +1.1 sigma (KB Homes warned recently of higher cancellation rates in orders)
XRT: ST model confidence 73%, +1.3 sigma
KBE: ST model confidence 58%, +1.4 sigma
HYG: ST model confidence 82%, +1.1 sigma
Copper: LT model confidence +83%, +0.8 sigma
DAX at model value on ST and LT models
Companies with high sales exposure to China – majority of names trade to rich to macro-warranted values

If earnings weakness had been the main fear in consensus outlooks, the next few weeks will be telling as we enter what has been a big area on the S&P500 of 4000-4100.

The question we are left with is whether the risk-reward here is attractive enough to bet on a soft landing. Investors will only benefit from for lower European gas prices or China re-opening for so long.

11.01.2023

EURUSD - a roadmap

On Qi, the market has already run slightly ahead of fundamentals. EURUSD screens as 0.7 std dev (1.9%) rich to model.

That is not a big Fair Value Gap by historical standards. But that begs the question what is level where the single currency’s rally starts to look overextended?

The table below shows the results of back-testing various Qi FVGs as sell signals for EURUSD and the answer is clear – the sweet spot is when the cross gets one sigma rich to model.

But remember Fair Value Gap alone is not the only variable we consider when it comes to acting on a signal.

What model value is doing is equally important. Currently it is trending higher; it has risen 3.3% over the last month for example suggesting overall macro conditions are indeed supportive of Euro appreciation.

A rich FVG simply shows the market has moved quicker than macro fundamentals - some of the good news has already been priced in.

It is only when model value has stopped rising that we have a divergence pattern and a rich FVG becomes an actionable signal. In effect, the market is rich and macro conditions have stalled.

Ideally when model value rolls over that signifies the macro environment has started to deteriorate. Combining that with a rich FVG gives us a bearish inflection signal.

The good news is while that sounds like a lot of moving parts for investors to follow, on the Qi portal it's all easily viewed on each model page.

PDF download

09.01.2023

Earnings Season

This list isn't exhaustive but includes most of the blue chip names reporting earnings this week. And of that list, the majority sit to the left of our 65% threshold for a macro regime.

For these stocks, it's business as usual for a stock picker. Company fundamentals matter more than the macro environment.

Five names though display high sensitivity to macro conditions. There are no big valuation gaps but a couple of observations:

Boston Scientific is only 2.1% cheap to model. But that's the first time it has screened as cheap to macro since late June.
All three financials have seen increases in macro-warranted model value early in the new year. Since Dec 30th Blackrock's target price is up 4.3%, Jefferies model value has risen 4.6% and JP Morgan is up 5.1%. Macro conditions are improving.
In contrast, model value for Albertsons is flat-lining. Unlike financials, aggregate macro conditions for this consumer staple stocks is treading water, awaiting the next clue on direction.

05.01.2023

Tactical Trading

We have been talking for some weeks now about regime change in US equities. 2022 was all about the Fed; 2023 looks like it could be more about the real economy.

Mainly that’s because sensitivities are shifting – less about real yields, more about economic growth & industrial metals.

But it’s also because model confidence is falling.

However, Qi's Short Term models for US equity indices are extraordinarily strong. Using a 4month rather than 12month look-back period, macro explains 97% of the variance in the Dow!

In fact, there are a number of interesting observations we can take from our Short Term models right now. This quick video looks at:

the "true" January effect - tactical versus strategic trading, and the need for patience
how equities are closely tracking macro patterns. 2023 is once again shaping up to be a macro-driven year!

01.01.2023

Qi Macro Factor Glossary

Learn more about the Macro Factors

PDF download

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