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07.12.2021
RETINA™ - XLI vs. XLU
US Industrials are one sigma (2.2%) cheap versus Utilities relative to the macro environment; close to a 1 year low in Qi’s Fair Value Gap terms & now RETINA™ is flagging a bullish inflection signal.
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David Moum Nbqlwhovu6K Unsplash
06.12.2021
R.I.P. the 2021 reflation trade
The chart shows Qi’s measure of US inflation expectations in z-score terms back to the start of January 2020.

The initial deflationary shock from the first Covid lockdown in March 2020 was a 7 standard deviation event. The Q4 2021 scare saw inflation expectations rise to 3 standard deviations above long term trend.

Since then inflation expectations have fallen hard & have reverted a fair way back towards trend.
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Hs 2009 25 Hubble
03.12.2021
Green light for US High Yield
In “Beware High Yield” we noted that US High Yield was starting to look cheap versus its macro environment. At that point, however, macro model value was still deteriorating so a clear buy-the-dip signal wasn’t quite there.
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02.12.2021
Where next for the US Dollar?
It’s that time of year when year ahead predictions start to clutter up inboxes. 12 months ago the entire market seemed unified around a bearish US Dollar view. Fast forward a year & long the Dollar seems to be the consensus 2022 call.

The chart below plots Qi’s macro-warranted model fair value for the Dollar against its DM peers. All indexed to 100 on Jan 1st it shows how macro fair value has evolved over the last 12 months. All show USD as the base currency – EURUSD, AUDUSD etc are inverted.
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Anna Anikina Ath9Gmakfpe Unsplash
01.12.2021
Fed Taper & equity positioning
Chair Powell’s assertion that Quantitative Tightening could be accelerated has added to a year-end defensive feel to equity markets. Which equity styles / sectors / indices offer the best refuge in a faster taper scenario?
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29.11.2021
A Tesla alternative
Big, broad risk off events can have a silver lining. They can provide attractive entry levels for long term thematic investments that are more secular than cyclical.
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Juskteez Vu Tirxot28Znc Unsplash
29.11.2021
Omicron - leaders & laggards
Sharp moves in holiday thin markets inevitably leads to anomalies. Where are the opportunities in the aftermath of the Omicron sell off?
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25.11.2021
Beware High Yield
The iShares ETF tracking US High Yield is once again being driven by macro factors after 3 months out of regime.
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Sunil Ray Aqprqg Ji3C Unsplash
24.11.2021
Equities lead bonds?
US Financials hit one sigma cheap versus US Real Estate last week. That’s one of the biggest Fair Value Gaps of the last 12months.
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Juskteez Vu Tirxot28Znc Unsplash
23.11.2021
All aboard the ARK?
Strong outflows, high short interest, rising bond yields which in theory hurt technology & biotech. There is a growing list of headwinds for Cathie Wood’s ARK funds.
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David Moum Nbqlwhovu6K Unsplash
06.12.2021
R.I.P. the 2021 reflation trade
The chart shows Qi’s measure of US inflation expectations in z-score terms back to the start of January 2020.

The initial deflationary shock from the first Covid lockdown in March 2020 was a 7 standard deviation event. The Q4 2021 scare saw inflation expectations rise to 3 standard deviations above long term trend.

Since then inflation expectations have fallen hard & have reverted a fair way back towards trend.
See more
Monday
This may seem inconsistent with many peoples’ views on the economy.

Supply bottlenecks remain. High frequency economic data has been mixed but Data Surprise indices continue to tick higher. The Fed are contemplating a faster taper. The next CPI report is due Friday & the top end of the forecaster’s range includes prints of 7.0%+.

It is, however, consistent with the flattening of the US yield curve. Thus far at least, the Fed’s policy response is seen as capping the rise in inflation.

It also reiterates the need for equity managers to understand macro. Recent market volatility underpins the idea equity markets are struggling to compute the degree to which elevated valuations are simply a function of Fed easy money policies, & how much is due to healthy underlying company fundamentals. The latter requires stock picking skills. The former requires a robust framework to quantify the myriad of macro risks facing investors.
Hs 2009 25 Hubble
03.12.2021
Green light for US High Yield
In “Beware High Yield” we noted that US High Yield was starting to look cheap versus its macro environment. At that point, however, macro model value was still deteriorating so a clear buy-the-dip signal wasn’t quite there.
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Qi fair value for HYG now appears to have bottomed. In fact, RETINA™ is flagging an inflection signal with both spot & model value turning higher over the last 3 days.
Screen Shot 2021 12 03 At 095214
Another US High Yield ETF JNK is also being flagged by RETINA™. Again a bullish inflection signal, this time with spot 1.4 sigma (1.0%) low versus model value

Away from ETFs & for those executing in Fixed Income markets, CDX US High Yield spreads are 1.6 sigma too wide & once again the recent trend towards wider spreads in macro model value appears to be topping out.

All three back-test well. Using current FVGs as entry levels the hit rates are 54%, 60% & 88% respectively.

Qi’s S&P500 model remains out of regime. In part because long-held sensitivity to credit spreads has waned. It will be interesting to observe whether a potential turn in credit spreads provides a broader fillip to risky assets.
Anna Anikina Ath9Gmakfpe Unsplash
01.12.2021
Fed Taper & equity positioning
Chair Powell’s assertion that Quantitative Tightening could be accelerated has added to a year-end defensive feel to equity markets. Which equity styles / sectors / indices offer the best refuge in a faster taper scenario?
See more
Wednesday
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.
Raychel Sanner 0Pswkddfxii Unsplash
25.11.2021
Beware High Yield
The iShares ETF tracking US High Yield is once again being driven by macro factors after 3 months out of regime.
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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.
Screen Shot 2021 11 25 At 170034
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.
Screen Shot 2021 11 25 At 170056
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.
Sunil Ray Aqprqg Ji3C Unsplash
24.11.2021
Equities lead bonds?
US Financials hit one sigma cheap versus US Real Estate last week. That’s one of the biggest Fair Value Gaps of the last 12months.
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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).
Histogram Line Chart New Size
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.
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