Week of 11/7/2016 – Market Resilience Index Ratings
Both the US stock and bond markets have been through a period of heightened vulnerability over the last several weeks. For the week of November 7, US stocks have a resilience rating of 2, up from 1 the prior week. This higher rating is because the Micro Market Resilience Index MRI has turned positive and is now gaining strength. This is an important shift and could lead to higher prices, barring strongly negative news or events.
The effective date for this rating is 11/7/2016. The US presidential election will be held the following day. Resilience will be higher that week regardless of which candidate wins. Some observers will say that the markets are rendering a verdict on the winner, but my statistics suggest that it is simply the beginning of a normal short cyclical move providing support for higher prices. Of the 5000+ weeks since 1919, 87% had a higher Micro Resilience level than last week’s level, which means it is currently near the lower extreme. Since the Micro MRI is particularly rhythmic in its movement up and down, it is a good bet that it will move higher over the next several weeks and provide support for prices.
Should the stock market decline after the election, possibly in reaction to the winner, the decline is likely to be short-lived. There will likely be a rebound, and "market concerns" will seem to pass quickly. Coincidentally, the level of the Micro MRI now is very similar to its level at the time of the Brexit vote. After Brexit, there was a decline in the US stock market and then a meaningful recovery.
In an earlier market (link) overview, I mentioned that the period of March 2015 through January 2016 was a bear market in terms of MRI levels, but one that failed to produce large-scale declines, panic or capitulation. As 2016 has progressed, the resilience measures indicate that we are rebounding off the bottom of our phantom bear market. However, that rebound is not as strong as is typically the case just after bear markets that are expressed as major price declines. This mid-term malaise is detectable in the US stock market’s MRI levels and is evident by the current lack of the Exceptional Macro MRI. In a typical rebound, the Exceptional Macro MRI persists for several quarters. In this one, it lasted just a few months.
The anemic rebound may be a reflection of concerns about global growth, US election uncertainty, and conflicts in the Middle East. Thus, while we can expect higher stock market resilience (which supports higher prices) through the end of the year, the New Year could bring a change in the overall character of the market.
Global Stocks
The effective date for this rating is 11/7/2016. The US presidential election will be held the following day. Resilience will be higher that week regardless of which candidate wins. Some observers will say that the markets are rendering a verdict on the winner, but my statistics suggest that it is simply the beginning of a normal short cyclical move providing support for higher prices. Of the 5000+ weeks since 1919, 87% had a higher Micro Resilience level than last week’s level, which means it is currently near the lower extreme. Since the Micro MRI is particularly rhythmic in its movement up and down, it is a good bet that it will move higher over the next several weeks and provide support for prices.
Should the stock market decline after the election, possibly in reaction to the winner, the decline is likely to be short-lived. There will likely be a rebound, and "market concerns" will seem to pass quickly. Coincidentally, the level of the Micro MRI now is very similar to its level at the time of the Brexit vote. After Brexit, there was a decline in the US stock market and then a meaningful recovery.
In an earlier market (link) overview, I mentioned that the period of March 2015 through January 2016 was a bear market in terms of MRI levels, but one that failed to produce large-scale declines, panic or capitulation. As 2016 has progressed, the resilience measures indicate that we are rebounding off the bottom of our phantom bear market. However, that rebound is not as strong as is typically the case just after bear markets that are expressed as major price declines. This mid-term malaise is detectable in the US stock market’s MRI levels and is evident by the current lack of the Exceptional Macro MRI. In a typical rebound, the Exceptional Macro MRI persists for several quarters. In this one, it lasted just a few months.
The anemic rebound may be a reflection of concerns about global growth, US election uncertainty, and conflicts in the Middle East. Thus, while we can expect higher stock market resilience (which supports higher prices) through the end of the year, the New Year could bring a change in the overall character of the market.
Global Stocks
The European stock market has a rating of 1, unchanged from last week. Out of the major equity markets, this one shows most stress. Its positive Exceptional Macro Resilience MRI has failed to result in a positive Macro MRI, which would be expected over the next few weeks.
The Japanese and Chinese (Shanghai Composite) stock markets are beginning to show more resilience, with ratings of 2. Emerging Market stocks continue to be resilient (rating 3).
The global stock as a whole appears more resilient. The rating of the MSCI World stock market index is 2. I believe that rating will increase to 3 over the next few weeks.
I analyzed the relative resilience between Contrarian mutual funds (funds that buy low quality company stocks) and Quality Growth stock mutual funds. Over recent months, the low quality stocks have been favored over high quality stocks. It appears that this will continue for the next several weeks, and may even be more pronounced.
Commodities
Commodities in general continue to be resilient, with the exception of Gold. Its resilience is deteriorating. Gold has declined in price recently and there may be a temporary stabilization of Gold prices. Mid- and longer-term, however, it appears that its resilience will be weak. It is currently rated 1.
Crude Oil is currently rated 3, the highest resilience rating. I expect it to drop to 2 in the next few weeks. Price increases may not occur or may be more muted at that time. At the moment, the Macro and Exceptional Macro MRIs are positive and strongly so.
Bonds
Resilience in bond markets in general is deteriorating. For example, the US High Yield bonds market is rated 2, down from 3 the prior week.
Finally, global inflation-linked bonds are more resilient than global bonds. This reflects heightened inflation concerns. Based on the MRI ratings, I expect inflation-linked bonds to continue to be favored for the next several quarters. Of course, a shift toward higher inflation has been expected for some time, and there have been several false starts over the last three years.
The Japanese and Chinese (Shanghai Composite) stock markets are beginning to show more resilience, with ratings of 2. Emerging Market stocks continue to be resilient (rating 3).
The global stock as a whole appears more resilient. The rating of the MSCI World stock market index is 2. I believe that rating will increase to 3 over the next few weeks.
I analyzed the relative resilience between Contrarian mutual funds (funds that buy low quality company stocks) and Quality Growth stock mutual funds. Over recent months, the low quality stocks have been favored over high quality stocks. It appears that this will continue for the next several weeks, and may even be more pronounced.
Commodities
Commodities in general continue to be resilient, with the exception of Gold. Its resilience is deteriorating. Gold has declined in price recently and there may be a temporary stabilization of Gold prices. Mid- and longer-term, however, it appears that its resilience will be weak. It is currently rated 1.
Crude Oil is currently rated 3, the highest resilience rating. I expect it to drop to 2 in the next few weeks. Price increases may not occur or may be more muted at that time. At the moment, the Macro and Exceptional Macro MRIs are positive and strongly so.
Bonds
Resilience in bond markets in general is deteriorating. For example, the US High Yield bonds market is rated 2, down from 3 the prior week.
Finally, global inflation-linked bonds are more resilient than global bonds. This reflects heightened inflation concerns. Based on the MRI ratings, I expect inflation-linked bonds to continue to be favored for the next several quarters. Of course, a shift toward higher inflation has been expected for some time, and there have been several false starts over the last three years.
