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They include:

This time is different. The four most dangerous words in investing.

However, it is worth noting that this time around the move in model confidence comes from a higher starting point. Most of the Short Term models that constitute the Vol Indicator were tracking at 90% plus over January and February.

That's why the blue line is so low in the most recent part of the chart above.

To that extent, it may suggest we need to see a more sustained move higher, i.e. the Vol Indicator needs to increase by 30 or 40 points over the month rather than the usual 20.

Remember the core hypothesis* underpinning the Vol Indicator is that macro is inherently a more stable regime for markets than periods when positioning, deleveraging, sentiment shifts or geopolitics are driving price action. While model confidence is over 65%, macro is still the prevailing regime.

Finally, it is worth noting which components are responsible for the latest increase in the Indicator. The two biggest moves come from:

The point being it looks like Europe is at the epicentre of this move. The European single currency and equity market is predominantly where the regime shift is taking place.

Given our observation that European equities and European High Yield credit (iTRAXX XOver) rank amongst the most vulnerable risky assets, this Vol Indicator is worth watching and would appear to have a strong EU flavour.

* the PDF download below has the White Paper which provides an initial introduction to our Vol Indicator.

This is important because it reflects what the interest rate volatility market is discounting in terms of changes in the Fed's balance sheet.

Rate vol is still just below trend but it is bouncing; this suggests the recent 'mini and hidden' easing cycle is unwinding. The 'mini and hidden' easing cycle?

In recent weeks there has been a stream of articles recently pointing to the fact that, at the global level, Central Bank liquidity has been increasing.

Between TGA and Reverse Repos in the US, Yield Curve Control in Japan plus PBoC liquidity injections the net effect has been financial markets have actually benefitted from an easing of financial conditions.

Fed QT expectations are only one part of the overall liquidity picture but, given the role liquidity has played in justifying the recent rally in risky assets, this needs watching.

Consider the chart below for example:

It shows the breakdown of macro factors currently driving the S&P500 on Qi's Short Term models. Central Bank quantitative tightening expectations accounts for around a third of the model.

Both ST and LT models showed the S&P500 as rich in February. This week's sell off has closed the Valuation Gap. The critical issue now will be watching Qi model value to assess if we have a new bear trend.

QT for the ST model, economic growth and industrial metals for the LT model. Are these key drivers pointing to a new downleg in aggregate macro conditions; or are they being offset by others? Qi shows this in real-time.

And then this is the treemap for today. More red signifying a growing number of bearish signals.

The chart below shows the number of signals as a percentage of the S&P500. Remember only single stock in a macro regime (model confidence > 65%) warrant a signal.

So, looking across the entire S&P500 during the October / November rally, bearish signals flat-lined at low levels, while bullish signals got into double digit territory.

During the January rally bearish signals were negligible while bullish signals ran in a 5-10% range.

Now, in February there's been a notable spike in the number of bearish signals the machine is firing out.

Where are those bearish signals coming from?

February has seen the largest number of bearish signals in Consumer Cyclicals in a year:

The machine has not been bearish on any Communications Services stocks since last summer. Until now.

There were only bullish signals on Financials between early December and late January. The first red bar appeared in the third week of Jan and they've been moving higher since.

Further methodology detail available but, in brief:

This is a beta test of this new product. Upgraded functionality and greater model coverage will all follow in due course.

Between Mar 2020 & January this year model confidence was below our 65% threshold - TongCheng was a micro play, i.e. it was all about idiosyncratic risks. It was business as usual for any stock picker focused exclusively on company fundamentals.

Now though the macro environment explains 72% of the variance in the stock price. Investors need to be aware of the macro influences on the stock.

In the chart below, the red line is Qi macro-warranted model value for TongCheng – where the stock ‘should’ trade given all the current macro info (includes economic fundamentals like GDP growth, inflation), measures of Financial Conditions (real yields, credit spreads) & risk appetite (VIX, EM VIX etc).

Having moved sideways for much of H2’22 macro conditions improved at the start of December. The move higher in the red line reflects China’s re-opening.

At first, the spot price embraced the idea of Chinese tourists hitting the road & the stock price rallied hard – more than macro. But recently it has pulled back.

GS have cut the stock from ‘buy’ to ‘neutral’. But their target price is HKD 20.50 (currently HKD 17.80). Qi says macro-warranted model value is close to the GS target – HKD 19.73.

A quick & easy way to identify a potentially cheap entry level for a China re-opening trade.