Week of 10/17/2016 - Market Resilience Index Ratings

Week of 10/17/2016 – Market Resilience Index Ratings

Both the US stock and bond markets have been through a period of heightened vulnerability over the last several weeks.  As expected, bonds (as measured by TY1) moved to a higher rating this week.

The tables below show the Market Resilience Index Ratings for both US 10y bonds and US stocks. The first table and chart focus on US 10y bonds (TY1). The ratings have indicated low resilience (meaning moderate vulnerability) for the last several weeks.

Trade Date
Bond Market Rating (TY1)
                * Likely to move to a rating of 2 over next few weeks.

The recent price movements have not been large, but there is some indication that prices have moved according to the resilience measures.  The screenshot below shows the price of TY1 along with two vertical lines. The first line (white) shows when the rating dropped to 2 from 3, effective 7/14/2016. This indicates that high resilience had peaked. One can see that the prices peaked just before that date. The second vertical line (red) shows when the rating dropped to 1 from 2, effective 9/2/2016. One can see that prices softened after that time. The minimum rating is 0, so there was still some resilience for bond prices. The current reading, effective this Friday 10/14/2016, indicates stronger support for bond prices.   Thus, bond prices are likely to stabilize over the next few weeks and could even move higher.

US stocks, as measured by the Dow Jones Industrial Average, currently have a rating of 1 and may soon move to a rating of 2.  While an upgrade has not happened yet, I expect it to take place within a few weeks. Of the 5000+ weeks since 1919, 84% of them have had Micro MRI levels higher than the current reading.  This suggests that we are closer to the beginning of a strengthening of prices than to additional price declines because of a lack of resilience. However, the resilience reading is still low so there may be some near term declines.  

Between now and that shift, we may have some price dips that represent global stresses, but the duration of the dips is likely to be short given that we see some modest level of resilience in a number of equity markets globally.  These stock markets are rated 2 (moderately resilient) or 3 (resilient) for this week: MSCI World, DJ Transports, NASDAQ, Russell 2000, UK Stocks, Emerging Market stocks. These observations suggest that, barring major negative news or events, US stock prices can reach new highs over the next month or so.

Commodities have the highest resilience of the major asset classes right now.

The S&P Goldman Sachs Commodity Index represents a basket of commodities with a high weighting in crude oil. Crude oil (not shown in graphic) continues to have a rating of 3. Please note that crude is a volatile asset and can differ meaningfully week to week from the MRI ratings. Over long periods of time, however, the ratings result in profitable trades.

Gold has a rating of 2, moderately resilient. There may be near-term price softness, but the Macro and Exceptional Macro MRI continue to be positive, and prices are likely to be more resilient mid-to-longer term.

There are changes this week for currencies. The GBPUSD has a new rating of 1, which means there is even less support for the GBP. It has already fallen in response to Brexit concerns. The recent shift in vulnerability suggests that value may continue to weaken; buying GBP right now is likely to be premature.

The dollar index (DXY) has moved to 1 from 0, meaning that it now has some resilience, although it is still at a very low level.

Overview of market resilience ratings for stock, bond and commodity markets. #marketResilienceIndexes #marketOutlook #InvestmentResearch