1.K-Shaped Trades Have Run a Long Way 

XLK has enjoyed an extraordinary run in risk-adjusted returns. Over the last six months, the Sharpe has approached the highs since 2009 close to a 5 Sharpe. 

However, PB data shows gross risk at multi-year highs and net risk at 1-year highs, echoing the long tech / short consumer trade that defines today’s K-shaped economy thesis. 

This is mirrored in Qi’s valuation model. The chart below shows the XLK vs. XRT RV pair is currently +2 sigma above Qi’s model value. That is almost the largest Qi valuation gap of the last 5yrs. The FVG has jived closely with spot price action i.e. we should pay attention given we are in the tails of the distribution. 

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Since 2009, the current FVG has been reached 10 times. 7 out of those 10 times, XLK underperformed XRT over the subsequent month. 

Be aware the bifurcation relative to other more defensive compartments of the market. XLP sits 2.7 sigma BELOW Qi model value, which is the 5yr low. Such a rare occurrence that since 2009, this has only occurred 3 times. And all 3 times, XLP made gains over the following 4-6 weeks.

Continue reading our analysis on the other headlines by downloading the PDF below

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