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Our partners at Omega Point provide next generation portfolio analytics. Their focus is predominantly on smart beta factors which means aligning their signals with Qi’s macro factors makes a powerful combination.

Their latest Factor Spotlight takes 3 Qi factors – Fed rate expectations, Fed QT expectations & 10y US real yields – to provide stock pickers with an empirical look at the securities most vulnerable to the early 2022 shift in financial conditions.

Here we take the 9 NASDAQ stocks in their analysis & add Qi’s macro valuation overlay.

Three names – Atlassian, DexCom & Lululemon – have already moved to discount a fair degree of bad news. Interestingly, after a 6week downtrend, all 3 show model value potentially bottoming out. In the Lululemon chart above, macro-warranted fair value (red line) is showing tentative signs of stabilising at recent lows.

TEAM & DXCM are around 0.75 sigma cheap to macro; LULU is 1.1 sigma or 13% below macro-warranted fair value. All three back-test well at current FVGs.

Lululemon is the pick of the bunch – it is only been this cheap to model & in macro regime 14 times since 2009. Buying those dip produced a 93% hit rate & +7.8% average return.

Fed hawks may argue it’s too soon to buy dips. In which case note Splunk SPLK is 0.4 sigma (5.5%) above model. That’s a modest FVG but it is the one stock that has lagged in the down trade & is still rich to macro.

It has taken just 3 trading days in 2022 to take real yields back above their long term trend.

The current move is still small relative to other big macro shocks. 2013’s taper tantrum was a 4 standard deviation event on Qi; March 2020 posted an even bigger swing from initial lockdown to Fed policy response.

That notwithstanding this is a sharp move & one which, should it continue, would threaten risk appetite across global capital markets. Qi users can track shifts in the same z-score terms via “Top 10 Driver Macro Shifts” in the top corner of the Qi portal’s home page.

Yesterday, the ST Fair Value Gap on the S&P500 model was negligible: -0.2 sigma or 0.6%. Spot was effectively at macro-warranted fair value. That FVG now stands at -0.75 sigma or -2.2%.

The ST model is inherently more noisy & a tactical rather than strategic tool. But how significant is that discrepancy between where the market is now & model value? Below we show the efficacy of using different FVGs as a buy-the-dip signal.

A key premise of Qi is to use quantitative techniques to help guide your investment process. Use the factor moves & valuation gaps to provide signals about what is driving asset prices, & what the balance of risks are.

The back-test results above suggest the balance of probabilities favour a bounce. Individual investors may emphasis poor sentiment, or a ‘this time is different’ mentality.

History may not repeat itself but as it often rhymes, it is worth embracing a framework to help try & skew risk-reward in your favour. The above provides a roadmap which can provide an additional input into the discretionary process.

Qi’s Long Term model for the S&P500 remains below the key 65% confidence threshold, but the Short Term model has been in a strong macro regime since October. Model confidence is currently 78%.

We always default to the Long Term model with its rolling 12mth look-back period. Relationships are more stable, valuation signals typically back-test better. But, in a more tactical market, there will be times when the shorter 4mth rolling window, can offer value.

The ST regime is show above (click chart to expand). It is a Goldilocks scenario – reflation plus tight credit spreads & healthy risk appetite. But the biggest standout is the relationship with the Fed’s monetary policy stance.

Both Fed rate expectations & QT expectations are positive drivers. On current patterns, rate hikes & QT are consistent with higher S&P500 – they reflect a healthy underlying economy that is comfortable with policy normalisation.

These relationships could change again. At the factor level there will be a tipping point where a higher terminal rate &/or faster pace of hikes become equity negative. Qi would capture that via S&P500 sensitivity to Fed rate expectations (the shape of the Euro$ curve) flipping from positive to negative.

Real time, quantitative tracking of critical shifts in macro relationships. Lazy narrative versus robust process.

Reading down each column shows a US sector versus its peers. Each cell shows Qi’s Fair Value Gap with heat map colouring – the darker the red (green) the richer (cheaper) the FVG is. Greyed out text means the FVG comes with a health warning as that model is not in a macro regime.

There is a fair degree of grey indicating several sector RV pairs are not currently driven by macro factors. However, that said, there is a distinct skew suggesting defensives are rich to the macro environment, while cyclicals are cheap.

The Utilities (XLU), Consumer Staples (XLP), Health Care (XLV) & Technology (XLK) columns are all predominantly red. Meanwhile cyclical plays like Financials (XLF), Energy (XLE & XOP) & Industrials (XLI) screen as cheap.

Retail is consistently cheap. There may be good reasons for that. XRT includes some low quality, high beta & relatively small cap names. Those fearful of a slowing economy & tighter Fed policy stance, may want to avoid such exposure. But be aware, at these levels, XRT is already pricing a fair degree of bad macro news.

Most FVGs are modest but the split on Metals & Mining (XME) is interesting – crudely, cheap versus defensives, rich versus other cyclicals. Is the market buying into a long China, short domestic US play as Beijing eases while the Fed tighten & Biden’s Build Back Better fails?

USDCAD is now 1.4 sigma (2.3%) rich to model in Qi FVG terms. That’s toward the top end of recent ranges.

The dominant drivers are highly intuitive. CAD bulls need stronger commodities, a “risk on” environment (low VIX, tight credit spreads) & for the BoC to hike rates quicker than the Fed.

So, given the renewed sell-off in equity & energy markets, USDCAD should be rallying right? Looking at the independent pattern between the entire macro environment & USDCAD actually shows fair value is essentially flat-lining.

Spot has overshot relative to the aggregated macro backdrop. It needs still lower crude / higher VIX to justify current levels.

Back-testing the efficacy of a +1.4 sigma FVG as a sell signal since 2009 reveals a 70% hit rate & +1.01% average return. The sample size is small – only 10 instances when USDCAD is in regime – & an average trade duration of 9 business days makes it more tactical than strategic.

Still, a reminder that simplistic assumptions about macro relationships come with a health warning. Qi gives a holistic, empirical snapshot of macro fair value in real time.