1. Cyclicals are at new highs. Macro isn’t there yet.
2. Europe HY Looks the Vulnerable Trade
3. QQEW: The One Still in Regime
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1.Cyclicals are at new highs. Macro isn’t there yet.
As earnings season winds down, the GS Cyclicals vs Defensives ex-Commodities basket has broken to fresh highs.
Qi’s model value has not.
To justify current spot levels, Qi suggests the macro backdrop needs to improve further: VIX closer to a 15-16 handle and CDX HY spreads back towards 300bp. Breadth also remains poor.
The pair now trades 0.9 sigma above Qi model value, close to the upper end of its historical range. As the chart shows, prior gaps like this have tended to close via spot converging back toward model.
So the setup is clear: if the earnings-driven idio impulse is now fading, macro needs to take over.
That means easier financial conditions and economic surprise indices continuing to grind higher.
Without that, cyclicals look priced for more macro support than they currently have.
Continue reading our analysis by downloading the PDF above
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