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In outright terms, US technology is currently not explained by macro factors. NASDAQ, US IT, XLK, SOXX etc are all below our threshold for a macro regime. However, the relative value model of XLK vs. SPY is in regime with model confidence at 69%.

That regime demonstrates tech’s resilience in a defensive environment. XLK outperforms when inflation expectations & commodities are falling, when real rates decline & credit spreads widen. This is a good entry level for those thinking the reflation trade is due further consolidation.

Note though that one third of model explanatory power comes from Quantitative Easing expectations. Tech needs ongoing Fed QE to outperform. Long XLK versus the broader market looks good tactically given the entry level, but there is clear event risk on the horizon – if the June 16th FOMC does start the clock for a possible taper of Fed asset purchases, on current patterns that will provide a significant headwind to the US tech sector.

The chart below shows the 10 biggest valuation gaps across all Qi’s global ETF relative value models. European Autos (EXV5) is in three of the top 10 FVGs; & each time it is cheap & at a one year extreme.

There is a strong need for bottom up analysis here - to assess the impact from the shortage in semiconductor chips & possible production cuts. Align Qi’s macro valuation plus trend/momentum analytics with company fundamentals.

From a macro perspective, Autos are 6.8% cheap versus Travel & Leisure EXV5 vs. EXV9, 6.8% cheap vs Banks EXV1 vs. EXV5 & 5.6% cheap vs Media EXV5 vs. EXH6.

All back-test well. Buying Autos vs Banks at 1.4 sigma since 2009, for example, produces a 75% hit rate & +1.7% average return. Moreover, it now has a Divergence signal too with spot price of EXV1 / EXV5 & macro fair value moving in opposite directions over the last 10days.

Separately, Qi RETINA™ has flagged a momentum sell signal on European Industrials. The sector is in a strong macro regime but there is no FVG of note. This is not a valuation call, but a pure trend signal – the uptrend looks stretched & has started to lose momentum.

* since April 15th's "Copper - the pause that refreshes" spot copper has rallied 10.5%. The FVG was -0.3 sigma at that time & now stands at +0.8 sigma. Macro-warranted model value has moved higher from $428 to $435, but spot has moved up more aggressively.

Improvements in the vaccination programme, increased mobility & the fact that it has lagged the US, are all cited as reasons why Europe benefits from the next wave of the reflation trade.

Qi’s European Technology vs Financials model is in regime (76% model confidence) with an intuitive set of drivers. The European Technology sector may be smaller than its US equivalent but it shares the same defensive characteristics. Falling inflation, declining commodities & wider credit spreads are all consistent with tech outperforming banks.

But at +1.3 sigma (+4.3%) the Fair Value Gap for the SX8P / SXFP ratio is getting towards the top end of recent ranges, suggesting a fair degree of that news is in the price.

Back-testing the significance of the +1.3 sigma FVG as a sell signal since 2009 produces a decent hit rate (63%), a negative average return but positive median return of +1.1%. There is a fat-tail of outsized losses that skew the results. Adding a discretionary overlay & incorporating stop/losses alongside the Qi valuation signal is critical.

Still, as a trade expression for a European re-opening, this merits consideration.

The rotation trade that has dominated equity markets has been undergoing a consolidation for the last month. For many, this is a pause before the primary trend re-establishes itself. The second phase of the reflation trade could be more discerning than a simple growth versus value dynamic though.

Divergence between winners & losers could take a different shape. Pricing power is one variable that could be key. Which stocks have the ability to pass higher raw material costs onto the consumer in the form of higher prices?

Bottom-up analysis will provide one answer. It is worth overlaying that with the quantitative top down picture. The chart above shows the eleven GICS Level 1 US sectors & their sensitivity to US inflation expectations.

Should any of these relationships turn negative, we would have an empirical demonstration that rising inflation had flipped from being a tailwind to a headwind for that sector.