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That represents a perfect round trip since “Suga high” on September 6th when the Nikkei was 1.3 sigma (4.1%) rich on Qi. That flag was a little early (the Nikkei peaked a week later) but the message was simple – while politics had powered the rally, Japanese equities were in a strong macro regime & at valuations that look stretched. What’s the macro picture now?

Nikkei model confidence dipped (in line with its global peers) but critically stayed in a macro regime – a regime that emphasises domestic reflation (rising inflation expectations & a steeper yield curve) & easy financial conditions (Central Bank QE & tight credit spreads).

That combination of macro factors are offsetting each other such that macro model value is currently moving sideways. Hence the sudden & substantial Fair Value Gap.

How significant is this FVG level historically? Since 2009 there have been 13 occasions when the Nikkei has been in regime & 1.3 sigma cheap to model. Buying the dip has produced an impressive 85% hit rate for an average return of +7.6%.

As always, this time could be different. It feels like equity bears are gathering a bit of momentum right now. But it ‘felt’ like Suga’s resignation was going to be the catalyst for the great Japanese catch-up trade. For those who believe this is merely a correction, one of the world’s most cyclical assets is presenting an interesting opportunity.

Last week, poor results from Bed Bath & Beyond saw the stock fall 20% plus. Qi’s BBBY model is not in regime &, as such, the 1.9 sigma (46%) deficit between spot & macro fair value, comes with a health warning. Note though model confidence has risen nearly 20% in the last month &, at 53%, is close to forming a new macro regime.

It is noticeable that the drivers of this fledgling regime are similar to the broader US Retail sector. XRT model confidence is high (71%) & stable. Retail bulls want domestic US reflation (higher real rates, steeper yield curve, rising inflation expectations) married to global growth & no stress in China.

Together that mix means Qi macro warranted fair value is currently trending sideways. Last week’s sell-off means spot price is diverging lower. As a result, XRT is 0.5 sigma (4.7%) cheap to model. That’s close to a 1y low for the FVG.

XRT may be too broad a vehicle. Some may argue fiscal stimulus plus suburbanisation / home improvement trends combined to give previously beaten up old school retailers a lift; & now, as the tide goes out, the bricks-&-mortar versus online retail split will reassert itself.

Fair, but note online retailers have also been caught in the downdraft. IBUY is now 0.5 sigma (3.2%) cheap to its macro environment. A buy the dip opportunity for a secular outperformance trend; or, could there be a broader message about US growth at work?

Each cell in the grid below shows the Qi Fair Value Gap for that FX pair. The bigger the positive (negative) FVG the deeper red (green) the cell is coloured. Black font in the cell means the cross is a function of macro factors; when greyed out, that model is out of regime. Read down each column to get the aggregate picture for any one currency versus its peers.

Every USD fx pair is in a macro regime. Crudely, half are close to fair value, & half show the Dollar as modestly cheap. The two book-ends are AUDUSD where RETINA™ has posted a bearish inflection signal, & cable.

The recent spike in risk aversion has moved AUDUSD model value down below 0.70 leaving Aussie rich & vulnerable. It looks the best G10 candidate for those looking for further USD strength.

Indeed, Aussie crosses are consistently in macro regimes & rich. While that may surprise some given the 2.7% fall in Aussie TWI since the end of June, that fall has not kept pace with the macro factors – China, commodities, rate differentails, risk appetite – that currently drive it.

Cable is the one cross where the USD is rich: +1.1 sigma or 1.3% above model. Moreover, Sterling is consistently cheap, maybe confirming what some see as its new status as an EM currency.

Marrying the two together, contrarians might want to look at GBPAUD which is now 1.75 sigma (3.9%) cheap to model. Since 2009 longs set at this FVG result in a 67% hit rate & +0.9% median return. Though most of those signals were before the secular shift that is Brexit.

Labour costs were blamed for hitting FedEx results & driving the recent down trade. That move has taken the stock 10.4% below macro fair value. That’s a 1.1 sigma Fair Value Gap. Back-tests reveal buying the dip at that level produces a 55% hit rate. That hit rate jumps to 63% (for an average return of +2.6%) with a -1.5 sigma FVG.

Despite strong results Adobe stock has sold off. That has opened up a 13.2% FVG. All the good news is priced in goes the narrative.

Buying a -1.1 sigma dip since 2009 results in a 78% hit rate, +3.5% average return. A -1.5 sigma FVG is even more significant: 80% hit rate, +6.3% average return. The macro picture suggests a fair amount of bad news is priced.

For both, macro factors are important & can provide a roadmap of key valuation levels for those thinking about buying the dip.

Nike is not in a macro regime. We will defer to the bottom-up stock pickers on this one. Company fundamentals trump macro fundamentals currently.