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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.

Sharp falls in macro’s explanatory power often pre-empt bouts of higher volatility. The chart below shows Qi model confidence (blue) & 1mth implied USDJPY vol (red, inverted).

The aggressive fall in model RSq at the end of 2021 did lead USDJPY vol higher. There were tentative signs of increased model confidence in mid Feb before the RSq rolled over once again. And once again, it was followed by another increase in 1mth implied vol.

If a new regime reasserts itself, there are a few observations we can make.

Macro valuation signals once again carry more weight. Qi’s Historical Model Value chart show macro model value has consistently trended higher for USDJPY in 2022. The question is to what degree has the market front-run & overrun versus those improved fundamentals.

USDJPY is currently +1 sigma rich to model. Hypothetically, if model confidence was back above 65%, back-testing that FVG as a sell signal reveals a 78% hit rate & an average return of +1.0%.

Intuitively, volatility is lower when macro fundamentals drive the market rather than trend / flow / sentiment. The chart above is crude but does suggest long vol positions need to keep a close eye on Qi’s model confidence.

‘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.

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%).