Weekly Note - November 11, 2026

Summary

Our metrics indicate that long-term market resilience has peaked for both the DJIA and the NASDAQ, which historically has meant a lower chance of new market highs and a higher risk of losses over the subsequent months. Markets have also been choppy during 2026, which has hurt performance. Government actions and policy decisions have created short-term swings in prices, preventing actionable trends from developing. These conditions are likely to continue for the foreseeable future.

Leveraged ETFs for the DJIA and NASDAQ tend to perform poorly in these conditions, and over the next few weeks we will add unleveraged ETFs tracking these indexes. Thus, when markets lack strong trends, we will use the unleveraged versions of these indexes. When strong trends are expected to develop, as we describe below, we will use the current leveraged versions of these indexes. I will also shorten the list of ETFs. The trading process will remain simple, though there may be more trades going forward. I will provide more details in the coming weeks. This note describes the current market environment and the rationale for adjusting our use of leverage.

Recent Market Dynamics

Government action, persistent inflation (and the Fed’s efforts to fight it), the possible deflating of the AI theme, and the possible long-term productivity gains from AI will all affect the markets going forward. Here, though, I will focus on what I see in our metrics.

The most important recent development is that the markets have likely passed their peaks in terms of long-term resilience and have done so at relatively high levels. We measure long-term resilience with the Macro MRI, which tracks market price momentum and moves in multi-year cycles. The recent peaks mean the market is less likely to make new highs over the next few months.

The DJIA’s Macro MRI has peaked and is now in the down leg of its cycle, as shown in the figure below.



Last week’s market decline reinforced the new negative trend. The DJIA’s Macro MRI is at the 79th percentile of its levels since 1918, which is high. That is about where it stood in early 2000, around the peak of the dot-com bubble. It is slightly below its 2007 level and well below its early-2018 peak. Both of those periods were followed by long stretches of a negatively trending Macro MRI.

The picture for the NASDAQ is similar, and the NASDAQ’s Macro MRI negative trend is further along than the DJIA’s, as the figure below shows.


If historical patterns hold, the stock market is more likely to experience either sharp losses after temporary gains or a period of sustained losses over the next few months.

Although we haven’t seen it happen in the last 26 years, the Macro MRI could resume its positive trend from this level and move higher along with a market price move higher. This took place in May of 1987, a few months before the 1987 market crash (an abrupt loss of over 30%), and in May of 1999, a few months before the protracted losses of the early 2000s (a loss of over 35%). A significant move higher could be prompted by the excitement and productivity gains associated with AI, or a meaningful drop in oil prices and inflation. However, even if these take place, the move higher would likely be short-term; the Macro MRI cannot rise indefinitely, and high Macro levels indicate high investor euphoria. Losses can be significant when the euphoria ends, as was the case in 1987 and 1999/2000. Our theory is that long-term investors are complacent during the upleg of the Macro MRI and overreact to negative news during the downleg.

Peaks and Troughs of the Macro MRI Since 2000

The figure below shows the DJIA price level (log scale, dark blue), the Macro MRI (light blue), and the Exceptional Macro MRI (small vertical blue lines on the Macro MRI). The dashed red vertical lines mark the major peaks in the Macro MRI. The dashed green lines mark when the Exceptional Macro MRI indicates that the Macro MRI is likely to develop a positive trend. These tend to indicate the beginning of a strong long-term positive trend and are useful for our decisions about how much we use leveraged ETFs. Since 1950, the weeks after an Exceptional Macro MRI signal, up to the next Macro MRI peak, have been about one-third less volatile than other weeks, with higher average returns, the conditions in which leveraged ETFs work best.

Notice that the red lines often come before periods of market decline. That is the intended purpose of the Macro MRI: to highlight when declines are more likely.

The losses in the figure may look small and quickly recovered, but the figure uses a log scale, which makes losses look milder than they were. The loss from early 2000 to late 2002 was over 35%, and it took more than six years for the DJIA to return to its early-2000 price level. The loss from 2007 to the bottom in early 2009 was more than 50%, and it took more than five years to recover to the 2007 level. These figures are based on the DJIA’s price and do not include dividends. Including dividends would reduce the losses and recovery times, but not by enough to neutralize them.

Over the period shown, there are also stretches when the Macro MRI was trending down, but the market did not suffer protracted losses. The period from early 2018 through the end of 2020 is an example of this. The Macro MRI began its negative trend in 2018, and the market moved higher over 2018 and 2019 overall, despite a sharp drop in late 2018. When the COVID-related decline came in early 2020, the losses were dramatic and fit our theory of how investors react harshly to negative news when the Macro MRI is trending down.

A few other points about recent years are worth noting. First, the time between the peaks and troughs of the Macro MRI has been short compared to the earlier part of the history shown. As a result, periods of strong long-term resilience have been less frequent.

Second, the Macro MRI’s positive trend that began in 2025 (grey dotted line in the DJIA figure above) developed without triggering the Exceptional Macro MRI, which may be consistent with that trend being short and shallow.

Even after a Macro MRI peak, there continue to be smaller opportunities for positive returns that can’t be seen in the figures above. These are identified by the Micro MRI.

A Choppy Market

Over the past few years, market moves have often been driven by the administration’s actions, such as the abrupt introduction of tariffs. Abrupt week-to-week shifts put our processes at a disadvantage. Most of our models are designed to identify new trends at a very early stage. Shifts driven by forces outside the market are harder for our process, and many others, to capitalize on.

This is what investors call a choppy market: one where prices swing up and down frequently, often sharply, without making sustained progress in either direction. Price moves keep reversing before a trend can form.

In this context, our signal can perform satisfactorily, but relying solely on leveraged ETFs drags on performance. The manager of a leveraged ETF resets leverage every day (ProShares does this for DDM). When markets are choppy without a strong positive trend, this daily reset works against leveraged ETFs. This has been the case in 2026, and it has cost us a few percentage points of return.

It is best to avoid leveraged ETFs when there is not likely to be a strong positive price trend. Each time we get a new buy signal, we will check whether conditions favor a strong uptrend. If they do, we will use the leveraged ETF; if not, the unleveraged one: DIA for the DJIA and QQQ for the NASDAQ. I will update the weekly target weight report and the shares-to-trade worksheet to list both the leveraged and unleveraged ETFs. For each index, we will generally hold one or the other, not both. The change will be easy for you to implement, and I will introduce it over the coming weeks.

When a strong positive trend develops, we will resume using the leveraged ETFs. The Exceptional Macro MRI and our other tools help us tell when strong trends are beginning. Historically, this approach would have cut our worst decline roughly in half in exchange for somewhat lower returns in strong markets.

With hindsight, these changes should have been implemented some time ago. They would have improved performance in choppy and challenging markets and made the recent periods less stressful. Looking forward, they should allow us to feel more confidence in the approach over a wider range of market environments.

Weekly Note - July 17, 2026

We are getting closer to a likely shift to a more resilient market, at least over the short-term. This is best indicated by the Micro MRI for the various indexes that our stock ETFs track.

    DJIA / DDM:                                                Downleg, at the 46th percentile last Friday.
    NASDAQ / QLD:                                           Downleg, at the 21st percentile
    Europe, Australia, Far East / EFO                 Downleg, 53rd percentile

The NASDAQ appears closest to a shift to the upleg. Generally, moderately aggressive downlegs lose about 10 percentile points each week. If this is true for the current market, the NASDAQ could begin the upleg of its Micro MRI cycle in a week or so. However, historically it is most prudent to wait for the shift to its upleg to take place before entering the market. This is because abrupt declines often occur at the ends of downlegs. Thus, our portfolios are likely to remain conservative in the near term. Our portfolios will likely become more aggressive after the indexes shift to the uplegs of their Micro cycles.

The timing of a potential shift to the upleg of the Micro MRI cycle in a few weeks is consistent with the expected development of greater naturally occurring resilience. As you may recall, we forecasted greater naturally occurring vulnerability from later May through late July. We then expect a period of resilience that could last several months. After the period of naturally occurring resilience, we expect a new period of vulnerability later in the year.

Continued Directionless Long-Term Trend as Indicated by the Macro MRI

The Macro MRI measures the long-term direction of the market’s price moves and continues to lack clear direction. However, the underlying dynamics that determine the Macro MRI are tilting more heavily toward a negative long-term trend. Because of these dynamics, there is good chance that any short-term move higher will NOT become readily turn into a long-term positive price trend. 

Setting aside the issue of the ultimate long-term trend of the market, there is likely to be a good buying opportunity over the next few weeks for the NASDAQ and likely the other indexes. Thus, switching to a more aggressive portfolio at that time could make sense.

Assessing the Potential for Longer-Term Stock Market Declines

While not a formal part of the F15 process, stock market valuations can give insights into the potential for large losses. The figures below are from my notes a few weeks ago and show current stock market Price-to-Earnings ratios. By most of these measures, the market is currently expensive.

Figure 1 below shows the Price-to-Earnings for the DJIA from the early 1990s to the current date. The current ratio is about 25, which is close to the level during the internet boom of the late 1990s. Although it is lower than it was from 2023 through early 2025 (https://worldperatio.com/).

Figure 1 – DJIA Price-To-Earnings Ratio



The DJIA tends to have lower exposure to the technology sector than the S&P 500. We see the difference in the Price-to-Earnings ratio of the S&P 500.

Figure 2 shows the period from the late 1870s to the current date, a 100+ year history. The current ratio is 27, which places it higher than at any point over that period.

Figure 2 – S&P 500 Price-To-Earnings Ratio



The ratios described above do not consider prevailing inflation rates, interest rates, and corporate profitability. The Schiller P/E ratio, developed by respected economist Robert Shiller, reflects current economic conditions of different periods. The current Shiller P/E is close to an all-time high, as shown in Figure 3 below, spanning from the late 1870s to the present. It is lower than only the peak of the dot-com bubble of the late 1990s.

Shiller Price-To-Earnings Ratio for the S&P 500

The Shiller P/E divides the current price of the S&P 500 by the average of the last 10 years of earnings, adjusted for inflation. This metric is used to smooth out the fluctuations of corporate profits during business cycles, offering a long-term perspective on market valuation. (https://www.multpl.com/shiller-pe)

Figure 3 - Shiller Price-To-Earnings Ratio for US Stocks


The current valuation measure of the stock market based on the Shiller P/E suggests the market is very expensive.

High stock valuations suggest that investors believe that earnings will experience abnormally high growth over the next few years. The current high valuations are driven by AI stocks, which investors have assumed will accelerate earnings growth. While earnings growth may accelerate, investor expectations are extremely high. Should growth be lower than expectations, price declines may be dramatic.

We see the dramatic reactions in the historical record. After the dot-com bubble peaked and ended (2000–2002), the S&P 500 lost about 49% of its value and the Dow Jones Industrial Average (DJIA) dropped roughly 38%. During the Global Financial Crisis (2007–2009), the S&P 500 fell by 57% and the DJIA lost 54%.

The technology-based NASDAQ index dropped 78% from March 2000 through October 2002 during the collapse of the internet and dot-com bubble. It dropped 56% during the Global Financial Crisis, from 2008 through early 2009.

High stock valuations and the lack of strong direction in the Macro MRI make caution prudent for investors with investment horizons of several years or less.

Conclusion

There is likely to be a good opportunity to shift to a more aggressive portfolio (using F15 or another strategy) over the coming weeks. A move higher in stock prices is becoming more likely, but it may not be long lasting. At the moment, there is a slightly less than even chance that the short-term move higher will develop into a new positive long-term trend. But market dynamics could change over the next few months and make gains more likely. Please reach out with any questions.

Weekly Note - July 8, 2026

In September 2025, we developed a forecast of investor sentiment for 2026. The forecast identified three periods of investor euphoria that are shown as columns in the figures below. We call each period an Anxiety-Free Period, or AFP.  The first AFP has now ended, so we can begin evaluating how the forecast is performing and what it implies for the remaining two AFPs in 2026. 

The AFP forecasts are based on physics-based drivers of investment sentiment that are described in this paper, which I published September of 2025:

      https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5482086

The AFPs are based on expected solar energy variation and were developed without any stock market or economic information.  Yet, they are correlated to important inflection points in our Market Resilience Indexes, as discussed in the paper linked above.  AFPs are rare events. There have been 13 clusters of AFPs since 1935.  The last one occurred in 2017/8. The next one is expected to take place in 2033. In addition, they are abrupt. 

An understanding of these AFPs is relevant to Focused 15 Investing. Because the AFPs are rare and abrupt, when they have occurred, the F15 algorithms have not navigated all of them well.  The clearest example of the impact of a cluster of AFPs is the Crash of 1987. The crash was preceded by three AFPs. The market crash – a loss of 23% in one day - occurred just after the end of the final AFP in the cluster.  The three AFPs prior to the 1987 Crash coincided with a 44% price gain for the DJIA 12 months prior to the crash.  After the peak in price, the DJIA lost 30% over the next month.  The NASDAQ Composite gained 25% in the year prior to its peak in 1987.  It lost 25% over the subsequent month.  For both indexes, much of the prior year’s gain was lost within a month of the peak.

The 1987 AFPs were the most intense AFPs over the last 90 years.  Several smaller AFPs have occurred at other times during that period, and our algorithms have navigated successfully the medium and small AFPs. However, our analysis suggests that the 2026 AFP cluster is unusually strong, with an estimated intensity of about 80% of the 1987 AFP cluster. 

As of July 6, 2026, the one-year gains for the DJIA are about 20% and the gains for the NASDAQ 100 are about 31%. These gains are as not strong as those of the 1987 period. However, stock valuations are far higher now than they were in 1987 (as discussed in a prior blog post: https://marketresilience.blogspot.com/), which suggests less tolerance for disappointment and a greater risk of a price adjustment. Thus, caution is appropriate. 

Investor Euphoria During the 2026 AFPs

Based on our research conducted over the last several years, we created the forecast of this year’s cluster of AFPs and published the forecast in September 2025.  The first AFP of this cluster ended recently.  Thus, we can begin to evaluate the forecast objectively. A complete analysis will need to wait until after the final AFP of this cluster ends in December of 2026.  Thus, this analysis is preliminary. 

During an AFP, investor anxiety is expected to be unusually low, making markets more susceptible to euphoria-driven advances and later market losses. The three AFPs of the 2026 cluster are shown in Figure 1. The height of each AFP column reflects the expected relative intensity of the sentiment effect. The first AFP of the 2026 cluster is expected to be the most intense of the three. 

Figure 1

In prior AFP clusters, the stock market has often reached a major price peak sometime between the beginning of the first AFP and the end of the last AFP. The price peaks tend to occur close to the peaks of the AFP cluster.  In the 2026 cluster, the overall peak was forecast to be in late May, as indicated by the highest point across the three columns shown above. 

We track sentiment using Market Resilience Indexes, or MRI. These metrics measure stock index price acceleration, which we use as an indicator of whether investors are becoming more optimistic or more pessimistic in responding to prevailing economic and market news.  Figure 2 shows short-term price acceleration, as indicated by the Micro MRI, for non-levered ETFs tracking major US stock market indexes from the beginning of 2026 through July 3, 2026.

Figure 2

 

The vertical red line marks the beginning of the Iran conflict, on February 27, 2026. Falling Micro MRI readings indicate weakening short-term price acceleration and greater vulnerability to declines in response to negative news. Rising readings indicate strengthening short-term price acceleration.

Many MRI readings were already moving lower before the start of the Iran conflict, indicating that investors were becoming more likely to react aggressively to any negative news.  All the major index MRI readings reached extremely low levels in March.

Consistent with the September forecast, the market entered a period of unusually high investor optimism in April. The most apparent driver was the AI theme, best represented by QQQ (tracking the NASDAQ 100). However, Micro MRI readings rose sharply across all major index ETFs, suggesting the rapid shift to optimism was broader than AI alone.

The strongest AI-related price gains ended shortly after the first AFP peaked, as shown by the decline in the QQQ Micro MRI and the subsequent weakening in QQQ price performance. That pattern is consistent with the September forecast.

The Micro MRI positions in their cycles are:

    DJIA: Downleg at the 65^th percentile of levels since 1918

    S&P500: Downleg at the 50^th percentile since 1931

    NASDAQ 100: 44^th percentile since 1972

    Russell 2000: 78^th percentile since 1983

Most readings are no longer at extremely high levels, although the Russell 2000 remains relatively elevated.  If the current pace of declines continues, the Micro MRI will reach lower extremes in the next few weeks.  An inflection point at which the Micro MRI moves higher would indicate more resilience for the market.  Stock market prices would then likely move higher. This pattern would be consistent with the forecast we made 9 months ago.  

The current period between the first two AFPs, with Micro MRI readings trending lower, is a period in which the market is more vulnerable to declines in response to negative economic, earnings, or geopolitical news. If economic conditions require a price adjustment, this is the type of period in which that adjustment is likely to begin. That pattern would be consistent with our view that economic conditions heavily affect the magnitude of price moves, while physics affects the timing. 

Figure 3 shows ETF performance over the same period. QQQ/NASDAQ moved lower after the peak of the first AFP, while the DIA/DJIA has continued to move higher.

Figure 3

The DJIA, which has relatively little exposure to the AI theme, has continued to move higher during this period. The S&P 500, with greater exposure to AI and technology stocks, has weakened since the price peak that occurred shortly after the first AFP.

The DJIA’s continued advance, despite a declining Micro MRI, suggests that a positive medium-term trend may be developing. As of last Friday, neither the Macro MRI nor the Exceptional Macro MRI had confirmed that trend, although the Exceptional Macro was close to being triggered.

Possible explanations for the lack of stronger Macro confirmation are: 1) the Iran conflict in March and early April may have depressed the MRI readings, and 2) the DJIA’s limited participation in the AI-driven advance may mean that investors do not yet perceive its price level as excessive.

The upcoming naturally vulnerable periods that are candidates for price declines are:

-          Now to the end of July, before the second AFP begins.  This period of vulnerability is consistent with Micro MRI readings having recently been elevated and now trending lower. 

-          October and early November, which is between the second and third AFPs of the current cluster.  Since this period lasts just a month, it may not result in sustained declines.

-          The end of December, after the third and final AFP. 

During these periods, investors may react more aggressively to negative news.  Negative news may result from Iran negotiations, a more hawkish Federal Reserve policy to fight inflation, geopolitical tension, and concerns about the economics of AI investments. 

Market behavior so far in 2026 has been consistent with the forecast made in September of last year. Investor optimism increased sharply into the first AFP, the strongest AI-related gains faded soon after that AFP peaked, and the current decline in Micro MRI readings indicates that the market has entered a more vulnerable period before the second AFP begins. The window for a major July decline is narrowing, but the market remains in a vulnerable period before the second AFP begins. The next major candidates for meaningful declines occur later in the year. 

Weekly Note - June 17, 2026

The DJIA is at an all-time high, and the NASDAQ is slightly lower than its all-time high. In addition, the current high levels of the important MRI cycles are extreme by historical standards. This is not the time to be aggressive in our portfolios. The following sections highlight the rationale behind this view.

High Points in the Micro MRI Cycle

Our indicators of short-term price-change cycles, the Micro MRI, are at high levels for several indexes. All else equal, prices tend to move lower after high Micro MRI readings.

As of last Friday, the Micro MRI cycles are still in the upleg of the cycle (except as noted) with very high readings. The percentile levels for ETFs and the indexes they track are:

• DDM – DJIA (major companies): Upleg at the 98th percentile of levels since 1918
• QLD – NASDAQ / NASDAQ 100 (tech companies): Downleg at the 87th percentile since 1972
• EFO – MSCI EAFE (companies in Europe, Australia and Asia): Upleg at the 92nd percentile since 1972
• IWM – Russell 2000 (small companies in the US): Upleg at the 91st percentile since 1982

The Micro MRI for the NASDAQ index peaked June 5 at the 89th percentile. Generally, a level at the 85th percentile is considered high and suggests a shift to the downleg of the cycle may occur at any time.

The high levels for the Micro MRI for these stock indexes suggest that prices will weaken over the coming weeks. The shift this week of the NASDAQ to the downleg of the cycle may indicate the short-term positive price trend for US stocks is at an end. That said, these readings have been at high levels for several weeks, which is consistent with our expectation for positive investor sentiment described below.

Historically, stock prices have moved higher when the Micro MRI is the downleg of its cycles as long as the Macro MRI is clearly in the upleg of its cycle and/or the Exceptional Macro is present.  The Exceptional is not present for the DJIA, the NASDAQ, or any of the other stock indexes we track. The condition of the Macro MRI is therefore important.     

No Strong Positive Long-term Trend in the Macro MRI

For the DJIA and NASDAQ stock indexes, the Macro MRI is at high level but does not have a strong trend, either positive or negative.

• DDM – DJIA (major companies): 76th percentile
• QLD – NASDAQ / NASDAQ 100 (tech companies): 86th percentile

At present, the data that drives the Macro MRI suggest that they are more likely to develop a negative trend rather than a positive trend.

Abrupt Sentiment Shifts

As you may recall, several months ago, we forecasted a period of abruptly changing sentiment to begin with a shift to positive sentiment by April of this year. That shift took place. We expected a shift to naturally occurring negative sentiment at the end of May. This shift has not been apparent yet in market prices. A review of past similar conditions suggests that a three or four week delay is not uncommon.

The two periods of naturally occurring negative sentiment that are candidates for meaningful price declines are 1) end of May through mid-July, and 2) the end of the year.

The condition of the Micro and Macro MRI and the expected abrupt negative shift are a key cause of our conservative portfolios over the last several weeks. Adding to this are the economic repercussions of the Iran conflict. Higher oil prices are leading to higher costs and inflation, which the Fed seeks to correct with higher interest rates. All of which tend to slow economic growth.

Valuations

Valuations levels such as Price-to-Earnings (PE ratio) relate current market prices to the economic activity of the companies in the index. The PE ratio tends not to determine when the stock market will fall, but it does shed light on the magnitude of a price decline that may be needed to move the ratios to more typical lower levels.

The following chart shows statistics for the S&P 500 because of its long history and easily obtained historical data. For the PE ratio, the chart below shows the Shiller PE (https://www.multpl.com/shiller-pe), which is good for long-term historical comparisons. It is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio).



The important point of this chart is that the current PE ratio of the S&P 500 (31.98) is as of June 2026, far above the historical median value (15.08). Stock prices are expensive by historical standards. High levels of this ratio tend to occur after euphoric periods (Roaring 20s, Post War Boom, and Dotcom Boom) and before major stock price declines (Crash of 1929, Dotcom Bust, and Global Financial Crisis.

There are other measures of stock valuation, such as Price-to-Sales and Price-to-Book ratios. These also show that the current prices are high compared to the economic fundamentals of the companies in the index.

There may be economic dynamics that will ultimately justify what we observe in the figure above. But the conclusion that stocks are currently very expensive is consistent with the objective metrics that determine the MRI.

Weekly Note - December 17, 2025

Performance Review

The table below shows performance figures for 2025 through last Friday (Dec 12) for two accounts following Focused 15 model portfolios, along with several alternative investments. The account following the Main model portfolio, shown in the gold box, returned 14.0 percent. A measure of risk, defined as the variability of weekly returns and indicated by the standard deviation, was 5.9 percent. The ratio of return to risk for the year to date is therefore 2.4.

Return indicates how your account grows over time, and higher is better. The 14.0 percent return is similar to that of the Dow Jones Industrial Average ETF, DIA, and the Schwab Balanced Fund with a 60 percent stock and 40 percent bond allocation, SWBGX. This result is generally consistent with expectations for the Main Focused 15 portfolio.

The variability of returns indicates how smoothly the account grows over time. Lower variability is better. Although variability is more abstract than return, it is useful for comparisons across investments. The 5.9 percent variability for the Main model portfolio is less than half that of the DJIA ETF and slightly lower than that of the most conservative Schwab fund, which has a 40 percent stock and 60 percent bond mix, SWCGX. It is lower than all of the alternative investments shown.

Year to date through December 12, 2025	Return	Variability (standard deviation of returns)	Return / Variability
Main Model portfolio	14.0%	5.9%	2.4
Main +1 Model Portfolio	15.6%	na	na
DJIA ETF “DIA”	14.1%	16.2%	0.9
SP500 ETF “IVV”	16.4%	17.3%	0.9
NASDAQ ET “QQQ”	20.0%	21.9%	0.9
40% Stock / 60% Bond Mix “SWCGX”	9.9%	6.7%	1.5
60% Stock / 40% Bond Mix “SWBGX”	14.4%	8.5%	1.7
80% Stock / 20% Bond Mix “SWCHGX”	17.1%	10.0%	1.7

The combination of strong returns and low variability results in a high return-to-variability ratio of 2.4, which is significantly higher than the alternatives listed. This indicates that the Focused 15 portfolios have delivered high returns for the level of variability incurred.

This information is useful for several reasons. First, it suggests that the portfolios have been successful in avoiding losses while participating in stock market gains, which is the objective of the trading process.

Second, the high ratio suggests that the investment process may continue to reduce losses going forward.

Third, the lower level of variability allows investors to more comfortably use a more aggressive model portfolio than they otherwise would. By following a more aggressive Focused 15 model portfolio one can get higher returns and still have a level of variability that is comparable to the Schwab balanced funds, which are often used for retirement accounts.

One account I monitor uses a model portfolio that is always one step more aggressive than whatever model portfolio is designated as the Main portfolio. The aggressiveness of this account can be described as “Main  +1.”  That account returned 15.6 percent for the year-to-date period, which gives it higher returns than the fund “SWBGX.” Unfortunately, comparable variability-related data are not available for this account.

Selecting a Level of Aggressiveness

For those with a relatively short investment horizon, the Main model portfolio, which I personally use, may be appropriate. For those with longer investment horizons, such as investors in their 20s and 30s, more aggressive portfolios that are always one or two steps more aggressive than the Main model portfolio may be appropriate. See page 3 of the weekly report for return and variability information for the full range of model portfolios. 

Over the course of 2026, the gold box representing the Main model portfolio may shift to take advantage of the market dynamics described below. You only need to remember how many steps above or below the Main model portfolio you have selected as your long-term position.

2026 Outlook

I do not usually provide a 12-month outlook, but 2026 is likely to be unusual. The information below does not require you to change anything about how your account is managed, other than continuing to follow your selected level of aggressiveness (e.g., Main +1, or Main +2).

If historical precedents over the past 100 years continue to apply, the stock market is likely to experience a boom-and-bust pattern over the next 12 months. There have been 13 such episodes since 1935, with the most recent occurring in 2017 and 2018. One of the largest episodes in recent memory was in 1987. The DJIA peaked in August of 1987 following a 54 percent gain over the prior 12 months. After this market boom, the DJIA experienced a 35 percent loss over the following four months.

The next boom is likely to begin over the next several weeks and will reach its peak in approximately May of 2026. Depending on the strength of the boom, I may shift the Main model portfolio to a more aggressive model portfolio.  

Research on Physics-based Drivers of Investor Sentiment

The forecast above is based on over 90 years of long-term cycles in stock market performance and their relationship to solar energy variation. A paper describing this research is available on a preprint service at the following location.

       https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5482086

Feel free to download the report and to forward the link to anyone who might find the information useful. 

To date, I have not changed the investment process based on this research. The research findings however, make implementing the target weights less stressful. They help us identify when the market is performing as expected and when it may be vulnerable to declines if economic conditions require a rapid adjustment in stock prices. At times, these periods of naturally occurring vulnerability can be anticipated several months in advance. The potential 2026 boom-and-bust episode is one such case.

Historically, the Focused 15 algorithms have been successful in participating in market booms. Busts, however, tend to begin abruptly, and the algorithms typically take a few weeks to adapt to the rapid shift toward negative investor sentiment. At this time, we cannot know how strong the boom might be or how severe a subsequent bust could become. The magnitude depends on economic and market conditions at the time. The timing of periods of vulnerability, however, is driven by naturally occurring cycles of investor sentiment described in the paper. As a result, we have a reasonably good sense of when the market is most vulnerable to a downturn.

We will not make a change based only on this research. Any boom will need to be identified and confirmed by the Market Resilience Indexes (MRI). As of this writing, the Macro MRI is shifting to a more positive trend, which could indicate the beginning of the boom. 

If historical precedents hold, market returns are likely to strengthen in January or February and continue through the spring, with a potential peak in late May or early June. June and July are likely to be periods of heightened vulnerability to a market decline. If economic conditions remain positive, the market may recover quickly, followed by a final vulnerable period toward the end of the year.

With this perspective, I currently expect to make these changes once it is clear that the boom period has begun:

1.      Increase aggressiveness of accounts for the several months prior to the peak, beginning at the end of 2025 or early 2026.

2.      End that period of aggressiveness just before the expected peak of naturally occurring resilience, roughly mid-May. 

3.      Increase aggressiveness in July.

4.      Decrease in late December or early January 2027

You do not need to take any unusual action during these shifts. Simply continue to follow your selected level of aggressiveness relative to the Main model portfolio (e.g., Main +1, Main +2). Also watch for a change in the Box #2 Cash level, which may change if the markets appear to be making an abrupt decline close to an expected period of naturally occurring vulnerability. 

Again, please let me know if you would like to have a call to discuss these issues. 

The table below shows the 13 boom-and-bust episodes since 1935. 

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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