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At the single stock level the picture is mixed. Walmart, Lowe’s & Home Depot are not in regime – company fundamentals matter more than macro currently.

Target & Macy’s are in regime but the valuation picture differs. The former is marginally above model. The latter has traded below macro-warranted fair value throughout 2022. The gap is currently 0.7 sigma or almost 10% cheap versus prevailing macro conditions.

At the sector level, macro’s influence is strong & rising. XRT model confidence is 78%. In valuation terms, at +0.7 sigma (+9.8%) XRT’s Fair Value Gap is close to 2022 highs.

However, this is not a significant level. Back-tests show a 54% hit rate & small positive average return. Essentially close to coin flipping territory.

Should we get there, selling a FVG of +1.0 sigma is more interesting with a 64% hit rate for an average return of +1.3%.

The drivers of XRT closely mirror those of the S&P500 – bulls want reflation, lower real rates, tighter credit spreads & well behaved risk aversion.

Retail could be an interesting one to watch for those who believe a bear market squeeze provides another selling opportunity.

There are two potentially interesting observations to highlight.

Every cycle is different. The Qi Vol Indicator moved ahead of the initial equity sell-off / VIX spike in January. More recently in April / May the two have moved higher together.

But, while VIX is consolidating somewhat, our Vol Indicator seems to be launching a fresh move higher. Should we see a one month increase of 20 or more, the chances of another leg in this “risk off” move could be imminent.

Put differently, to date, the 2022 bear move has felt generally quite orderly. Until this week that is when a sense of panic & capitulation has crept in.

The Qi Vol Indicator could be speaking to that next (potentially last?) & most aggressive phase of the bear move. Eyeballing the chart we are approaching levels which typically mark blow-out tops before reverting lower.

Qi has models for two cyber security ETFs that give investors exposure to the theme – HACK, ETFMG’s Prime Cyber Security fund, & BUG from Global X.

Both are in strong macro regimes & both are cheap to macro. In BUG’s case the deficit is over one standard deviation (-7.1% cheap to model).

The macro regimes are very similar & fairly intuitive for US equities – reflation, healthy risk appetite & tight credit spreads are the top 3 desires for cyber bulls.

That may mean investors who foresee a recession & subsequent “risk off” move will look past any macro-based valuation edge.

As always, use Qi Historical Model Value charts to gauge whether macro conditions are improving or deteriorating. Currently they continue to point south.

But, at these FVGs, some degree of bad macro news is already priced. It is also noticeable that valuation gaps are back to the cheap end of the range that has prevailed since late February when Russia first invaded Ukraine.

For those bullish on the cyber security theme, these look potentially interesting trades to monitor.

Watching Qi model value for a reversal higher in the S&P500 is probably the single most important chart we are currently watching. See “This time is different”.

In that context the chart below stands out. The DAX future is rich to model for the first time since the end of January.

The valuation gap is small - just +0.3 sigma, +1.7% - but it’s more the fact that it’s even positive when most of its peers show deeply negative FVGs.

Critically, looking at the Historical Model Value chart, macro-warranted fair value continues to trend lower for the DAX just as it does for the S&P500 & most global equity indices.

It could be the market believe the Fed, ECB etc can engineer a soft landing &, as such, Germany represents a decent cyclical bet. With most shunning growth strategies, value plays are a potential beneficiary for some asset allocators.

Looking at model attribution not only do the macro profiles look the same, if anything the DAX is a high beta version of Emini SPX futures. Risk appetite & credit spreads dominate the macro regime for SPX, together accounting for 41% of model value. It’s the same for the DAX except they explain 58% of Qi fair value.

In that context anyone fearful that wider credit spreads & risk off have more legs yet, the current risk-reward on the DAX do not look great.

The majority of Qi’s China-related models are not in macro regimes currently. Some, like FXI (large cap China ETF) & KWEB (China internet ETF) were in regime but macro lost its explanatory power in March – presumably as politics (strict lockdowns) assumed greater importance.

Others, like Shanghai Comp & Alibaba are either close to our 65% threshold or have model confidence trending higher.

The broader Emerging Market equity ETF EEM (where China is a 30% weight) is in regime & the current patterns show stronger China growth & a weaker Dollar / stronger Yuan both feature as top 10 drivers.

But while low model confidence means Qi valuation signals comes with a health warning, that doesn’t stop us from putting the recent moves in some critical factors into some historical context.

On Now-Casting, weak PMI data has reduced tracking Chinese GDP growth by around 3% (from 7.4% YoY to 4.3% YoY). In Qi z-score terms, this has taken growth 3.5 standard deviations below trend. Levels only surpassed during the initial Covid lockdowns & the Yuan devaluation episode.

Talking of 2015-16, the rally in USDCNH has now taken the cross 4 standard deviations above trend. Levels consistent with the Yuan devaluation. Not new news by any stretch, but essential context. Policy stimulus can only help but it is worth noting the starting point.