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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.

08.08.2023

Beware a summer vol spike

VIX has been below 20 for four months now, but there are tentative signs that equity volatility may be on the rise. Seasonal patterns certainly point that way.

Given the latest positional surveys suggest CTAs and vol targeting strategies are running long risk, it is imperative equity managers have a good handle on which of their holdings are most vulnerable to "risk off".

03.08.2023

The beta chase has likely run it's course

The S&P500 is up +20% for the year and the 12mth fwd PE multiple is back at 20x - expanding aggressively as CPI / hard landing fears are priced out.

At 20x we are at the 90th percentile of this valuation measure since 2003, notable when the risk free rate is 5.5%.

Read our analysis on Earnings expectations, Growth expectations, Financial conditions and Risk appetite.

01.08.2023

White Paper: Introducing Macro Factors

Understanding and applying the importance of macro factors

01.08.2023

Don't fight the US consumer

Amongst all this week's earnings, a key focus will be parsing company reports for clues on the health of the US consumer. Recent macro data (GDP, PCE, consumer confidence) have all suggested the consumer is in rude health.

Will that picture be endorsed by anecdotes from the retailers, hotels, cruise liners, casinos and car hire companies who report this week?

Given prevailing macro conditions, which consumer stocks offer best value for an ongoing catch-up trade for equity bulls?

Conversely, for the bears where are the tail risks which threaten to upend the party?

26.07.2023

Capitulation!

In the absence of a recession, bears looking for equity downside have been forced to revise their forecasts higher.

Sometimes, such widespread capitulation has some tactical signal power - reflecting the idea most shorts have now covered and positioning is cleaner.

We flag now because Qi's new economic growth basket gives equity investors a way to use liquid US single stocks to track now-casting's US GDP.

That basket, now available on Bloomberg, has some interesting messages when compared with cyclical indicators like Economic Data surprise indices and ISM new order - inventories.

19.07.2023

Watching credit

Credit spreads continue to grind tighter and provide sponsorship for the equity rally.

A rally that is still being led by the Magnificent Seven but which has recently shown signs of broadening out. Various metrics show cash is coming in from the side-lines, shorts are being covered, speculative/high beta stocks are performing strongly.

That begs the question how important is the role of easy credit in helping this rally continue and drag up the lower quality parts of the equity market?

On Qi, credit spreads are the second biggest driver of the S&P500 after interest rate volatility. But for the Russell 2000 that pattern is inverted and credit spread are the biggest single macro factor.

The Russell (below) also screens as twice as rich to macro as the S&P500. R2k is now over one standard deviation above macro-warranted model value (versus a +0.6 std dev FVG for SPX).

10.07.2023

Market is poised as we enter high summer

US Equity Indices have moved up strongly since bottoming in Oct (with a wobble in March) driven by credit and liquidity. The rally has been driven by a re-rating of some sectors, principally technology where key stocks are now trading back towards the top of their multiples, with EPS expectations still drifting down for the overall market.

The Market Story (Animal spirits) has been lifted by the advent of GPT4/AI and the impact on US manufacturing of the Inflation Reduction Act inspiring optimism for productivity and growth

Qi analysis suggests stalling model momentum for the SPX, driven by QT expectations, the most important factor, picking up.

05.07.2023

Liquidity > AI?

Bloomberg's John Authers has written an excellent article summarising the first half of 2023 and arguing the critical topic facing investors now is liquidity.

Even more than AI, Central Bank's stance on liquidity provision will dictate equity market performance for the balance of 2023.

The basic point is either you believe the Fed fold in the face of a crisis. Think March's bank run and the reality that liquidity will ultimately come to the rescue in times of stress.

Or, Central Banks have no choice but to continue hiking rates, draining liquidity to suppress demand in order to get inflation back to target levels. Things breaking are a necessary evil.

One of the big advantages of the Qi framework is the ability to build custom models to test certain scenarios. The chart below shows a custom model for the S&P500 including one additional variable - a proxy for Fed liquidity*.

27.06.2023

Re-visiting macro momentum

In "A red flag from macro momentum" we cautioned how Qi models were flashing some warning signs for US equities.

Where are we now?

At their highs in mid-June, both the S&P500 and NASDAQ were around 1.5 standard deviations rich to Qi model value. Both now show FVGs that are back within 0.5 std dev of macro-warranted fair value.

In both cases, that correction has come about because markets have corrected lower. S&P500 below.

19.06.2023

Too late to chase USDJPY upside

USDJPY is rich on Qi. Last week's rally has taken spot 1.3 standard deviations (5%) above Qi model value.

The story typically used to explain this latest rally is the contrast between the policy stance at the Fed and the BoJ. But macro has multiple moving parts and looking at two factor relationships in isolation can be misleading.

The chart below shows the divergence between Qi model value (flat-lining) and spot USDJPY (rallying) that has created that Fair Value Gap.

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08.08.2023

Beware a summer vol spike

PDF download

03.08.2023

The beta chase has likely run it's course

PDF download

01.08.2023

White Paper: Introducing Macro Factors

Understanding and applying the importance of macro factors

PDF download

01.08.2023

Don't fight the US consumer

PDF download

26.07.2023

Capitulation!

PDF download

19.07.2023

Watching credit

We can add that to a list that includes ARKK and the MEME ETFs: both +1.5 std dev rich.

What about credit spreads themselves? US High Yield spreads are in a strong macro regime - model confidence is 86% and incredibly stable.

They now screen as 0.5 std dev or 18bp too tight versus prevailing macro conditions. Not a huge Valuation Gap but towards the tight end of recent ranges.

For now though macro momentum is supportive. Model value is trending tighter. Model value has moved from 483bp at the start of June to 437bp now. Until this turns wider, any FVG simply flags a market that is running ahead of fundamentals. Not an imminent reversal.

However, to the extent that credit spreads are fairly fully priced, that does in turn imply it's going to be increasingly hard for low quality equity plays to keep performing.

This is not yet a signal even with extended FVGs because of macro momentum. It is, however, an indicator that the risk-reward trade-off is becoming harder to chase the catch-up trade in high beta.

The Qi US High Yield credit basket is a long/short pair with strong tracking and less onerous carry dynamics. It has fallen 11% since early May and this HY spread tightening move. It is trackable on Bloomberg and tradeable via our partner Investment Banks.

10.07.2023

Market is poised as we enter high summer

Looking broadly at global markets and central bank assets we can see a gap developing in this relationship that may require a catching down by risk markets:

Market analysts are quite confused about the forward path and a sharp move down would be exacerbated by positioning also:

Finally, FED Rate expectations have also moved to higher in the coming years – “Higher for Longer”. Though the market has taken this well so far, there is vulnerability in valuations as the discount rate has gone up

05.07.2023

Liquidity > AI?

The striking feature is the lack of any material impact from introducing this new Fed liquidity factor. The core S&P500 model has 92% confidence, puts macro-warranted fair value at 4,331 and shows the market as modestly (2.8%) rich right now.

The chart above shows the core outputs for the new custom model are almost identical. The overall macro DNA has not changed.

To be fair, Fed liquidity does feature as a top driver. On current patterns, a one standard deviation increase in liquidity (all else equal) is consistent with a 0.3% uplift for SPX. It's also true that sensitivity is rising. That same sensitivity was effectively zero in May.

So it is important. It's just that other macro factors are more important. Specifically, equities need the Fixed Income market to keep delivering low rate volatility and tight credit spreads.

Yet again, the bottom line is equity investors need to keep an eye on the bond market!

* Our Fed liquidity proxy takes the Fed's total assets plus the recent Bank Term Funding Programme, less the Treasury General Account and Balance of Reverse Repos.

We sum these, use a 200day moving average to smooth, and then introduce it as a new factor into our regular calculation, i.e. use Principal Component Regression to ascertain the orthogonal relationship between the factor and the asset price.

27.06.2023

Re-visiting macro momentum

Perhaps more interesting is how macro momentum for mega cap tech relative to the rest of the market is moving. The most extreme example is tech versus small caps.

Model value for QQQ vs. IWM peaked on June 9th and has subsequently fallen 6.6%.

Economic growth is the biggest single driver of the model (accounting for 22%) and the current pattern shows reflation benefits QQQ over IWM. The recent spate of disappointing economic data should be a drag on tech's relative performance.

For many, this may appear counter-intuitive. Shouldn't smaller, typically less profitable companies be more dependent on economic growth? In this instance maybe the relationship reflects valuations?

A slowdown may be somewhat priced by Russell 2000 stocks. The AI frenzy has, thus far, enabled tech stocks to shrug off recession fears and discount higher forward earnings. Q2 earnings season could be critical if this narrative is to be maintained.

The pattern is repeated across a number of models. At the sector level Software screens as cheap versus the broader market and macro momentum has turned lower courtesy of recent soft economic data - IGV vs. SPY.

The profile for a classic defensive versus growth play like Health Care versus Communication Services is the same.

Amongst indices, equally weighted ETFs for both the NASDAQ and S&P500 - QQQ vs. QQEW and RSP vs. SPY - are showing signs of potential outperformance versus market cap weighted ETFs.

There is a health warning. Fears about an impending recession have been constant for 12 months now. The latest downturn in Now-Casting tracking GDP consists of a handful of economic releases (Friday's PMIs especially).

Investors will want to see more than one or two data points to extrapolate a new and lasting trend.

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