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In the chart above we take a handful of Qi models for US equity indices, style factors & cyclical versus defensive sector RV pairs.

Any model to the right (left) of the vertical zero bound has a positive (negative) relationship with Quantitative Tightening expectations. Red (green) models above the horizontal zero bound are rich (cheap) versus their macro regime.

The widespread perception that Value outperforms Growth during a Taper Tantrum is empirically borne out at both the large cap (VTV vs. VUG) & small cap (IWD vs. IWF) level. Note, however, both show Value as around 0.5 sigma rich to Growth already. Not large but, to some degree, rising rate vol / higher yields are priced already.

The picture at the sector level also confirms a popular narrative - Technology screens as the big loser relative to Energy & Financials in a taper tantrum scenario. Both XLE vs. XLK & XLF vs. XLK screen as modestly cheap to macro fair value

A potentially attractive entry level for believers in a more aggressive Fed, although model value is heading lower in both cases. In addition to QT expectations, to outperform Financials need tight credit spreads while Energy needs low risk aversion.

Other cyclical / defensive sector pairs such as Industrials versus Health Care, or Materials versus Utilities are noticeably less sensitive to the speed with which the Fed normalises their balance sheet.

There’s no valuation edge but the technology angle to Solar (TAN) & Clean Energy (ICLN) means again they screen as investments vulnerable to accelerated Fed QT.

It is also below macro model value. The latest widening in HY credit spreads leaves spot HYG 1.4 sigma or 0.9% cheap to model. While that FVG is towards the bottom end of recent ranges, model fair value is trending lower. When fundamental macro conditions continue to deteriorate as they are currently, Fair Value Gap signals come with a health warning.

It is worth comparing the US High Yield model to its Asian equivalent. The iShares Asian High Yield ETF AHYG is in a strong macro regime but, in contrast to the US, it screens as rich to model. A +1.1 sigma FVG means it is 6.9% above macro fair value.

Like US High Yield, macro fair value is trending lower. The recent bounce in AHYG has not been supported by macro factors, but by flows – the ETF has seen a surge of inflows of late.

In Asia, hopes Beijing eases policy to help the property sector has prompted a wave of bottom fishing in AHYG. Thus far, the flow-induced rally exceeds any improvement in macro fundamentals. The macro environment is also poor for US High Yield, but there spot HYG has priced in a fair degree of bad news.

Previous analysis has discussed how the relative value between Financials & Real Estate can be used a way to capture the equity market’s view on interest rates - REITs tend to outperform (underperform) banks when bond yields are falling (rising).

The FVG on XLF vs. IYR has already corrected. From -1 sigma cheap on Friday to zero now. The move in bond yields post Powell’s renomination as Fed Chairman has seen Financials outperform.

Similarly, the -1 sigma FVG early in Sep occurred a few weeks before a 25bp back-up in 10y US Treasury yields. This begs the question can the Financials / Real Estate ratio offer any signal for US yields?

On the chart above the green vertical lines show every time the XLF / IYR ratio has hit 1.5 sigma cheap on Qi. That’s happened 12 times since 2015. On four occasions 10y US yields fell over the next few weeks; but eight times yields rose &, on average, that move was worth 7bp over the subsequent 4weeks .

A long way from being conclusive, but an example of how to use Qi data in your workflow. Markets often work with leads & lags; different asset classes discount macro shifts at different speeds. The Qi framework helps highlight how dislocations in one corner of the market can help signal opportunities elsewhere.

That was the message from “Black Friday starts now” where RETINA flagged that US Retail was cheap to the broader market back in mid-October ahead of an early & more protracted shopping season. Retailers subsequently outperformed the S&P500 by 7.5% & Qi’s XRT vs. SPY model now sits 0.7 sigma (2.5%) rich to macro.

During earnings season several retailers have referred to the threat from inflation. Bottom-up analysis looks at companies pricing power; Qi looks at a stock price’s relationship with inflation expectations.

The chart shows those retail Consumer Discretionary stocks that benefit (suffer) from rising inflation to the right (left) of the vertical bound. We also add a valuation overlay. Red (green) stocks above (below) the horizontal bound are rich (cheap) to macro model value.

The majority of retailers still want reflation but a sizeable minority now have a negative relationship where rising inflation is a headwind; presumably a function of margin compression.

Bed, Bath & Beyond is an example which also screens as 29% rich to model. Note though inflation is not a significant driver versus other macro factors. Garmin however has just started a new macro regime with inflation the top driver & the relationship is negative. The macro perspective suggests it is a stock that, on current patterns, has little pricing power.

Here we look at any US equity sector ETF with model confidence of at least 50% & then shock two China factors - Chinese GDP growth & sovereign CDS spreads - by two standard deviations. The blue bars show the subsequent percentage gain or loss in macro model value.

In short, US equity investors hawkish on China can find refuge in biotech but need to be wary of any energy exposure & the housing market.

The sector most vulnerable to a China shock is US energy. Every other macro factor held constant, XLE, XOP & OIH model value falls between 0.5 & 1.0% in the China stress scenario. They are, however, all already cheap to macro fair value.

Transport ETF IYT is the next most sensitive & is slightly rich (+0.3 sigma, +1.4%) to model. The standout though are Home Builders XHB & Home Construction ITB. Both screen as vulnerable & both are around one sigma rich to model.

Only two sectors see model value rise in this China shock scenario. Biotech ETFs IBB & BBH represent the best defensive play.

The Qi framework allows investors to run empirical scenario analysis. Not educated guesswork, but the quantified impact on any asset from an isolated move in certain macro factors.