Week of 9/5/2016 - Market Resilience Index Ratings

US Bonds

With a rating of 1 on the resilience scale, the US 10y Treasury yield is somewhat vulnerable to declines. I expect this condition to remain in place for the next few weeks. The Micro Market Resilience Index suggests resilience, while the Macro and Exceptional Macro continue to suggest vulnerability.

Credit spreads – US corporate BBB less 10y Treasury yields – are currently rated 0, suggesting that spreads will tend to narrow.

                                                                                            

Consistent with the above, US high-yield bonds are rated 3, or highly resilient. All else being equal, high-yield bond prices will tend to rise.

Bottom line: US bonds, in general, and high-yield issues, in particular, will remain attractive investments over the next few weeks.

Developed Market Stocks

US Industrial stocks, as represented by the Dow Jones Industrial Average, will continue to display moderate resilience over the next few weeks. Stock prices may soften, but I do not expect dramatic declines. Portfolios should maintain a positive exposure to US stocks as declines and subsequent increases may be difficult to capture.

UK stocks are rated 3 and have been resilient for the last several weeks. Qualitatively, they are getting a boost from the weakening UK currency. I do expect resilience to fade over the next few weeks, with UK stocks becoming more vulnerable to price declines.

European stock prices have a rating of 2, up from 1 in the prior week. 

Japanese stocks (not shown in graphic) also have a 0 rating, down from 1 the prior week. We should expect softness in Japanese stock prices.

Commodities

Overall, commodity prices are moderately resilient.

The S&P Goldman Sachs Commodity Index represents a basket of commodities, with a high weighting in crude oil. The S&P GSCI has a rating of 2. Crude oil (not shown in graphic) has a rating of 3 this week..

Gold is resilient andhas a new rating of 2 this week, down from 3 the prior week. 

Emerging Markets

Emerging market stock and bond prices are rated moderately resilient this week. At the moment, this appears to be a temporary breather because the Macro and Exceptional Macro Market Resilience Indexes are both positive. 

Chinese stocks, as represented by the Shanghai Composite, have a rating of 0, which was a new rating last week. Prices will be vulnerable to declines.

Currencies

The Dollar index DXY is rated 0 and is vulnerable to declines.

The Euro is rated 2, but may continue to appreciate because of the positive Macro and Exceptional Macro ratings. 

GBP is rated 1, which means it is somewhat vulnerable to declines. It is not as vulnerable as it was a few weeks ago.

Week of 8/29/2016 - Market Resilience Index Ratings

Resilience Outlook - US Industrial Stocks – High Resilience (minor revisions from last week)

Asset class detail shown below

The Focused 15 Investing model portfolios are responsive to the current resilience ratings as opposed to the expectations described above. However, the current state of the markets and their likely progression from here is worth noting. US industrial stocks have had a Market Resilience Index Rating of 3 for some time. While there may be greater fluctuation in the ratings (and prices) over the next few weeks, the interesting characteristic of this market is that it has been through a bear market pattern in terms of resilience changes but has avoided the abrupt price declines and ultimate sense of capitulation typical of bear markets. For stocks globally, most of the declines have happened in Europe and Asia.

The bear market pattern began in late 2014/early 2015. The peak of resilience occurred in March/April of 2015. The trough, at least thus far, occurred in early July 2016. The implication for US stocks is that prices may move higher from here, despite recently making new highs. I do expect some price weakness over the next few weeks. If we do not have major price declines over the next several weeks, it will indicate the beginning of a longer period of rising prices.

The Micro Market Resilience Index for US stocks is close to peaking for many assets. When it does start to decline, prices may soften. At the moment, it appears that the associated price declines will be minimal because of the presence of the Exceptional Macro MRI. The Focused 15 Investing model portfolios will likely have high equity allocations for the next few weeks.

Should the Exceptional Macro MRI also turn negative, we may see greater price declines. This is what we should be watching for over the next few weeks.

When the Micro MRI starts to move higher several weeks from now, we may see the kind of price pop we usually associate with the beginning of a new bull market.

A few months ago, I compared the current market condition to 2002. In recent weeks, the complexion of the market has shifted and now appears to be developing much more resilience than it did in 2002. Thus, that comparison is not as strong as it once was.

US Bonds

With a rating of 1 on the resilience scale, the US 10y Treasury yield is somewhat vulnerable to declines. I expect this condition to remain in place for the next few weeks. US 10y Treasury bond prices (not shown in the graph above) display strong resilience. Near term, resilience is abating, and prices may ease slightly. That said, the market does not appear especially vulnerable now, suggesting any decline in 10y bond prices will be moderate.

Credit spreads – US corporate BBB less 10y Treasury yields – are currently rated 0, suggesting that spreads will tend to narrow.

Consistent with the above, US high-yield bonds are rated 3, or highly resilient. All else being equal, high-yield bond prices will tend to rise.

Bottom line: US bonds, in general, and high-yield issues, in particular, will remain attractive investments over the next few weeks.

Developed Market Stocks

With a rating of 3, US Industrial stocks, as represented by the Dow Jones Industrial Average, will continue to display high resilience. Stock prices will tolerate negative news and events reasonably well in the near term. Over the last few weeks, the price declines are attributable more to a reversal of the recent strong gains than to an absence of resilience. 

UK stocks are rated 3 and have been resilient for the last several weeks. Qualitatively, they are getting a boost from the weakening UK currency. I do expect resilience to fade over the next few weeks, with UK stocks becoming more vulnerable to price declines.

European stock prices have a rating of 1. While more vulnerable than the DJ Industrial stocks, they have been finding more resilience over the last few weeks.

Japanese stocks (not shown in graphic) also have a 0 rating, down from 1 the prior week. We should expect softness in Japanese stock prices.

Commodities

Overall, commodity prices remain resilient.

The S&P Goldman Sachs Commodity Index represents a basket of commodities, with a high weighting in crude oil. The S&P GSCI has a rating of 2. Crude oil (not shown in graphic) has a new rating of 3 this week, up from 2, indicating that oil prices are resilient.

Gold is resilient and with a new rating of 3 this week.

Emerging Markets

Emerging market stock and bond prices continue to be resilient. EM stocks and bonds, represented by the MSCI Emerging Markets Index and a popular EM bond mutual fund, respectively, have ratings of 3. 

I expect that the rating for EM stocks will decline over the next few weeks.

Chinese stocks, as represented by the Shanghai Composite, have a rating of 0, which was a new rating last week. Prices will be vulnerable to declines.

Currencies

The Dollar index DXY is rated 0 and is vulnerable to declines.

The Euro is rated 2, down from 3 the prior week. This shift was expected.

GBP is rated 1, which means it is somewhat vulnerable to declines. It is not as vulnerable as it was a few weeks ago.

Week of 8/22/2016 - Market Resilience Index Ratings

Market Outlook and Market Resilience Index Ratings

US industrial stocks have had a Market Resilience Index Rating of 3 for some time. While there may be greater fluctuation in the ratings (and prices) over the next few weeks, the interesting characteristic of this market is that it has been through a bear market pattern in terms of resilience changes but has avoided the abrupt price declines and ultimate sense of capitulation typical of bear markets. For stocks globally, most of the declines have happened in Europe and Asia.

The bear market pattern began in late 2014/early 2015. The peak of resilience occurred in March/April of 2015. The trough, at least thus far, occurred in early July 2016. The implication for US stocks is that prices may move higher from here, despite recently making new highs. I do expect some price weakness over the next few weeks. If we do not have major price declines over the next several weeks, it will indicate the beginning of a longer period of rising prices.

The Micro Market Resilience Index for US stocks is close to peaking for many assets. When it does start to decline, prices may soften. At the moment, it appears that the associated price declines will be minimal because of the presence of the Exceptional Macro MRI. The Focused 15 Investing model portfolios will likely have high equity allocations for the next few weeks.

Should the Exceptional Macro MRI also turn negative, we may see greater price declines. This is what we should be watching for over the next few weeks.

When the Micro MRI starts to move higher several weeks from now, we may see the kind of price pop we usually associate with the beginning of a new bull market.

A few months ago, I compared the current market condition to 2002. In recent weeks, the complexion of the market has shifted and now appears to be developing much more resilience than it did in 2002. Thus, that comparison is not as strong as it once was.

US Bonds

With a rating of 1 on the resilience scale, the US 10y Treasury yield is somewhat vulnerable to declines. I expect this condition to remain in place for the next few weeks. US 10y Treasury bond prices (not shown in graph above) display strong resilience. Near term, resilience is abating, and prices may ease slightly. That said, the market does not appear especially vulnerable now, suggesting any decline in 10y bond prices will be moderate.

Credit spreads – US corporate BBB less 10y Treasury yields – are currently rated 0, suggesting that spreads will tend to narrow.

                                                                                            

Consistent with the above, US high-yield bonds are rated 3, or highly resilient. All else being equal, high-yield bond prices will tend to rise.

Bottom line: US bonds, in general, and high-yield issues, in particular, will remain attractive investments over the next few weeks.

Developed Market Stocks

With a rating of 3, US Industrial stocks, as represented by the Dow Jones Industrial Average, will continue to display high resilience. Stock prices will tolerate negative news and events reasonably well in the near term. Over the last few weeks, the price declines are attributable more to a reversal of the recent strong gains than to an absence of resilience.

UK stocks are rated 3 and have been resilient for the last several weeks. Qualitatively, they are getting a boost from the weakening UK currency. I do expect resilience to fade over the next few weeks, with UK stocks becoming more vulnerable to price declines.

European stock prices have a rating of 1. While more vulnerable than the DJ Industrial stocks, they have been finding more resilience over the last few weeks.

Japanese stocks (not shown in graphic) also have a 1 rating.

Commodities

Overall, commodity prices remain resilient.

The S&P Goldman Sachs Commodity Index represents a basket of commodities, with a high weighting in crude oil. The S&P GSCI has a rating of 2. Crude oil also has a rating of 2, indicating that oil prices are vulnerable to declines on a short-term basis. However, this looks to be a short-term breather from price increases rather than a fundamental shift in longer-term resilience.

Gold is vulnerable to declines on a short-term basis with a rating of 2.

Emerging Markets

Emerging market stock and bond prices continue to be resilient. EM stocks and bonds, represented by the MSCI Emerging Markets Index and a popular EM bond mutual fund, respectively, have ratings of 3.

I expect that the rating for EM stocks will decline over the next few weeks.

Chinese stocks, as represented by the Shanghai Composite, have a rating of 0, which is a new rating. Price will be vulnerable to declines.

Currencies

The Dollar index DXY is rated 0 and is vulnerable to declines.

The Euro is rated 3. I expect it to have a lower resilience rating over the next few weeks.

GBP is rated 1, a new rating that means it is somewhat vulnerable to declines.

Week of 8/8/2016 - Market Resilience Index Ratings

US Bonds

Market Resilience Index Ratings

For Week of…	8/8/2016	8/1/2016	7/25/2016	7/18/2016
US 10y Treasury Yield	1	1	0	0
US 10y Treasury Futures	2	2	2	3
Credit Spreads	0	0	0	1 v
High-Yield Bond Prices	3	3	3	2 ^

With a rating of 1 on the resilience scale, the US 10y Treasury yield is somewhat vulnerable to declines. I expect this condition to remain in place for the next few weeks.

By the same token, US 10y Treasury bond prices display strong resilience. Near term, resilience is abating, and prices may ease slightly. That said, the market does not appear especially vulnerable now, suggesting any decline in 10y bond prices will be moderate.

Credit spreads – US corporate BBB less 10y Treasury yields – are currently rated 0, suggesting that spreads will tend to narrow.

                                                                                            

Consistent with the above, US high-yield bonds are rated 3, or highly resilient. All else being equal, high-yield bond prices will tend to rise.

Bottom line: US bonds, in general, and high-yield issues, in particular, will remain attractive investments over the next few weeks.

Developed Market Stocks

Market Resilience Index Ratings

For Week of…	8/8/2016	8/1/2016	7/25/2016	7/18/2016
DJ Industrial stocks	3	3	2 ^	2 ^
DJ Transportation stocks	2	2	1 ^	1 ^
UK Stocks (UKX in GBP)	3 v	3	3	3
European stocks (SPE in EUR)	1	1	1	0
Japanese stocks (TPX in JPY)	1	1	1 ^	0 ^

With a rating of 3, US Industrial stocks, as represented by the Dow Jones Industrial Average, will continue to display high resilience. Stock prices will tolerate negative news and events reasonably well in the near term. Over the last few weeks, the price declines are attributable more to a reversal of the recent strong gains than to an absence of resilience.

UK stocks are rated 3 and have been resilient for the last several weeks. Qualitatively, they are getting a boost from the weakening UK currency. I do expect resilience to fade over the next few weeks, with UK stocks becoming more vulnerable to price declines.

European stock prices have a rating of 1. While more vulnerable than the DJ Industrial stocks, they have been finding more resilience over the last few weeks.

Japanese stocks also have a 1 rating.

Bottom line: Overweight US Industrial stocks, underweight European and Japanese stocks.

Commodities

Market Resilience Index Ratings

For Week of…	8/8/2016	8/1/2016	7/25/2016	7/18/2016
S&P GSCI	2	2	2	2
Crude oil (WTI )	2	2	2	2
Gold	2	2	3	3
Copper	3	3	3	3

Overall, commodity prices remain resilient.

The S&P Goldman Sachs Commodity Index represents a basket of commodities, with a high weighting in crude oil. The S&P GSCI has a rating of 2. Crude oil also has a rating of 2, indicating that oil prices are vulnerable to declines on a short-term basis. However, this looks to be a short-term breather from price increases rather than a fundamental shift in longer-term resilience.

Gold is vulnerable to declines on a short-term basis with a rating of 2. Copper, meanwhile, continues to be resilient with a rating of 3. Prices may soften near term, but longer-term resilience forces remain decidedly positive for the two metals.

Bottom line: Overweight commodities, in general, and gold and copper, in particular.

Emerging Markets

Market Resilience Index Ratings

For Week of…	8/8/2016	8/1/2016	7/25/2016	7/18/2016
EM stocks (MSCI MXEF in USD)	3 v	3	3	3
EM bonds (FNMIX in USD)	3	3	3	3
Shanghai Comp (CNY)	1 v	1	1	1

Emerging market stock and bond prices continue to be resilient. EM stocks and bonds, represented by the MSCI Emerging Markets Index and a popular EM bond mutual fund, respectively, have ratings of 3.

I expect that the rating for EM stocks will decline over the next few weeks.

Chinese stocks, as represented by the Shanghai Composite, have a rating of 1. There is minor support for higher prices, but this could prove fleeting in the absence of resilience from longer-term forces. I expect that the rating for Shanghai Composite stocks will decline over the next few weeks.

Currencies

Market Resilience Index Ratings

For Week of…	8/8/2016	8/1/2016
Dollar (DXY)	0	1
EURUSD	3 v	3
GBPUSD	0 ^	0
USDJPY	1	1

The Dollar index DXY is now rated 0, and is vulnerable to declines. It has a resilience rating of 0, down from a 1 the prior week. 

The Euro is rated 3. I expect it to have a lower resilience rating over the next few weeks.

GBP is rated 0, meaning vulnerable to declines. I expect it to have a higher resilience rating over the next few weeks.

The USDJPY rate is somewhat vulnerable to declines.  A declining USDJPY rate means strengthening JPY.    

Plausible Narrative

A plausible narrative that accommodates the broad set of MRI ratings across asset classes is...

Despite positive signs in the US, the global economy is struggling. There is high uncertainty about the political situations in the US, UK, and Europe. The best quick-fix remedy for all our ills is a mix of low interest rates and calming voices from the Federal Reserve’s Janet Yellen and her counterparts around the world. Globally, the US Fed has the most potent medicine, and it is needed. However, the US actually has the least need for it. We in the US will benefit more if the medicine is administered globally. For the time being, this will result in greater resilience for US stocks and bonds.

Please note:

·         The disciplined analysis of market resilience drives this narrative

·         Other narratives may also be plausible

·         When the bottom-up resilience data suggests a change in the narrative, that change will be made

·         The narrative does not affect the analysis of market resilience or the target weights in the model portfolios

Focused 15 Investing model portfolios are positioned according to a wide range of MRI ratings. However, the guideline is consistent across all markets – overweight the resilient, underweight the vulnerable.

Please contact me with questions or comments in the tab above.