Note - June 4, 2025

The markets are recovering from the tariff turmoil earlier this year.  The MRI readings for the DJIA indicate the status of stocks in general (as of May 30, 2025):

DJIA                            Percentile        Direction         Comment

  Micro MRI                  82^nd                 Positive            Cannot go much higher

  Macro MRI                 66^th                  Negative           Can move much lower from here

  Exceptional Macro     Not present                                Not close to providing resilience

This set of conditions indicates that the long-term trend of the market is negative and that the short-term rally in the stock market is nearing an end.  The Micro MRI cannot keep rising.  When it turns to a negative trend this week or next, none of the three MRI will be providing resilience.  That set of conditions will be unfavorable for the stock market.  Any negative news will produce a more negative move in prices than if the same news occurred during more resilient conditions.

Other US stock indexes show similar conditions.  The Micro MRI for the S&P 500 is even higher than the DJIA’s, and the higher level and negative trend of the Macro MRI suggests that the price of the S&P 500 can fall even more dramatically from this level compared to the DJIA.

S&P 500                   Percentile        Direction         Comment

  Micro MRI               93rd                  Positive            Cannot go much higher

  Macro MRI               77^th                  Negative          Can move much lower from here

  Exceptional Macro    Not present                              Not close to providing resilience

The NASDAQ also has a negative trend in its Macro MRI and the Micro MRI is at a high level. 

NASDAQ                    Percentile        Direction         Comment

  Micro MRI                 74th                  Positive            Cannot go much higher

  Macro MRI                 75^th                  Negative          Can move much lower from here

  Exceptional Macro      Not present                             Not close to providing resilience

Our algorithms will not respond to the high level of the Micro MRI.  Instead, the more successful strategy historically has been to wait until the Micro MRI has made the change to a negative trend.  I suspect this negative trend could be established this week or next.  The expectation would then be the beginning of a meaningful market decline.

If the Macro MRIs listed above had positive trends the outlook would be different.  Upward price moves could take place, albeit at a slower pace. 

A good case can be made that the negative trending Macro MRI for the US stock indexes is the result of the tariff turmoil of earlier in the year.  If that turmoil is now over, the market might treat it like a natural disaster. When a disaster strikes, the market may falter for days or weeks but will soon resume its prior path.  If this is the current scenario, the negative trending Macro MRIs will soon resume their upward trends. The algorithms can accommodate this. 

The algorithms for the DJIA current are leaning toward a resumption of an upward trend, while those for the S&P lean toward a continued negative trend and a new “Sell” rating this week.  Those for the NASDAQ are borderline.  All of these leanings close to the borderline can change meaningfully in one week. 

It is important to note that the naturally occurring long-term shifts in sentiment favor optimism, which suggest that prices can move higher from here and widespread panic is not likely.  This suggests that the negative Macro MRI trends are related to current economic conditions as opposed to naturally occurring cycles. 

The bond market is stressed.  It has struggled and pundits say it will continue to struggle as long as the US budget deficit problems remain inflamed by poor management of spending and tax receipts.  Our metrics for the US 10-year bond index is for it to become less resilient in a week or so, potentially sending yields higher.  This type of event is usually a negative one for the markets short term. 

Thus, the medium-term trend in the stock market that is relevant to us depends on the US administration’s actions.  A steady hand will steady the markets. 

If we look overseas at the EAFE Index, its MRI conditions are different.

EAFE                          Percentile        Direction         Comment

  Micro MRI                  29th                 Positive            Can go much higher

  Macro MRI                 49^th                  Positive*          Can go higher

  Exceptional Macro      Present                                     Is currently providing resilience

The condition for EAFE companies is more positive (*the Macro MRI recently changed to an upward trend, which is an optimistic indicator for the ETF) and may not have the negative effects of domestic US issues. However, it should be noted that the long-term performance of US stock indexes has been much better than non-US stock indexes.  Also, it is often said that if the US sneezes everyone else catches a cold. Thus, the addition of the EAFE ETF may not be a long-term solution. But it may present an alternative to the US indexes until our domestic issues are resolved or, at least, stabilized.

 

Weekly Note - February 19, 2025

The target weights this week call for a slightly higher weight in the commodities ETF “COM." Overall, our portfolios are very conservative. Their conservative posture is determined by algorithms based on current conditions of the stock market compared to what has happened over the last 100+ years.

MRI TRENDS

In the current situation, the short-term dynamics of the stock market tracked by the Micro MRI lack strong direction. In similar historical conditions, it has been best to take money out of the stock market for a few weeks and let a stronger trend develop. When the market has lacked a strong direction, it most often has led to the market moving lower.

This lack of direction contrasts with a more common situation when one or more of our MRI begins the downleg of its cycle at a very high level. We see these situations when an MRI is at a high level of, say, the 70th percentile or higher and shifts to the downleg of its cycle and has a negative slope. Based on the high percentile, the downleg tends to have a strong direction.

As of last Friday, the Micro MRI for the DJIA was at about the 41st percentile of levels since 1918, which is roughly mid-level. It has been at about this level for approximately a month and has had both a positive and negative slope over that time. In Figure 1 below, the yellow ellipse shows the horizontal trend of the Micro MRI over the last month.

Figure 1 – ETF DIA (Tracks the DJIA)

                        Source: CPM Investing LLC

It is this horizontal trend that has historically been followed by market price declines in most, but not all, cases.

Also in Figure 1, we see that the Macro MRI is at the 70th percentile and currently registers as being in the upleg of its cycle (“pos”= positive slope). It shifted to a positive slope from a negative slope over the last three weeks. Thus, it too has lacked clear direction over recent weeks.

As mentioned, the target weights are determined by an analysis of current dynamics compared to market history. For a look into the future, we now have the drivers of investor sentiment that highlight periods of naturally occurring optimism and pessimism. Historically, major market declines occur during periods of naturally occurring pessimism.

These drivers indicate that the market is likely to become more pessimistic in approximately the month of March (plus or minus a week or so). During this period, investors are likely to have the most pessimistic bias compared to recent months. Naturally occurring optimism will begin in roughly April. Thus, if there is an economic need for a price decline, March (roughly) will be the most vulnerable month in the early part of 2025.

VALUATIONS

One measure of an economic need for a stock market price decline is valuations. Figure 2 below shows the Price/Earnings ratio for the S&P 500 since records began in 1874.

Figure 2 – S&P 500 Price/Earnings Ratio

        Source: https://www.multpl.com/s-p-500-pe-ratio/table/by-month

At the far right is the most recent reading of 30.7. This is high by historical standards, although not at the highest levels. The Price/Earnings ratio decreases when the price drops and earnings stay the same, or when the price stays the same and earnings increase. Thus, high Price/Earnings ratios are often followed by stock prices that stay roughly the same or decline. Thus, a conservative stance makes sense.

INFLATION

Inflation is spiking, which tends to boost the prices of commodities. Thus, our commodities ETF “COM” has a higher weight. High inflation tends to hurt bond prices and, as a result, our bond ETF “UST” has a slightly lower weight.

Inflation also tends to result in higher stock prices because companies pass on to customers the higher prices of what they need to produce their products. Thus, if inflation continues, we could see the stock market becoming more resilient.
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