Be Patient with the Variability, Even with a High Macro MRI

The market is currently choppy.  I believe we are still seeing the effects of excessively high returns in the six weeks leading up to January 26, 2018.  Historically, it is very difficult to avoid or benefit from a choppy market using a weekly trading strategy.  Thus, we ride through this type of period as long as longer-term resilience (Macro resilience) is present. 

For the DJIA, the Micro MRI has been on the negative (vulnerable) leg of its cycle for several weeks and is, I believe, related to the choppiness.  As of last week (March 2), it was at a historically low level (~4th percentile).  It should soon turn and provide higher short-term resilience to stock prices.  Absent unusually negative news, stock prices are likely to move higher over the next 6 to 13 weeks.

The Macro MRI, indicating the longer term trend, has been positive and providing resilience since early 2016.  It is at a high level and beginning to weaken.  It could cease to be positive over the coming weeks or months.  Thus, we have MRI that will soon present opposing resilience forces.  Short-term (Micro) resilience is likely to increase.  Long-term (Macro) resilience is likely to weaken/decrease. 

Based on historical precedents, prices can move higher as a result of a positive Micro - even with a deteriorating Macro. 

I created two analyses to describe what the next several weeks could hold.  First, I compared last week’s various MRI statistics and other return information to the same statistics for the 5000+ weeks of history for the DJIA.  The weeks that are most similar to last week’s conflicting statistics tended to have positive returns over the subsequent 6 and 13 weeks.  Eighty percent had positive returns over the subsequent 6 weeks, and the average return was 3.2%.  Eighty-two percent had positive returns over the subsequent 13 weeks, and the average return was 5.3%.  This should provide some comfort as we ride through the choppiness.  

In this analysis, the similar weeks with negative subsequent returns, many had very high prior returns.  To investigate this pattern more fully, I focused the second analysis on the weeks with high Macro levels and their prior two-year returns.  I compared those weeks with the recent week.    

Over the two years prior to last week, the DJIA returned about 44%.  While this seems like a high rate of return, most of the weeks with high Macro MRIs experienced much higher returns over the prior two years (104 weeks). 

The chart below shows the 147 weeks out of the 5000+ for the DJIA with similarly high Macro MRI levels.  The bars represent the returns over the 13 weeks following the high Macro MRI reading. 

These columns are sorted (lowest to highest) by the return over the 104 weeks prior to the week in question. The leftmost week (9/12/1986) had a return of 42% over the prior 104 weeks.  Over the following 13 weeks, the DJIA experienced an 8.7% return.  Last week, which capped a 104 week return of 44%, would have placed second from the left. 

To the right are the weeks with progressively higher 104-week prior returns.  The rightmost bar has a prior 104-week return of 93% (9/6/1929).  This week was followed by a return (loss) of -31%.      

One can see that the weeks on the left – with relatively low prior 104-week returns – were followed by positive returns.  Last week would be in this area of the chart. 

Approaching the midpoint of the chart, we begin to see the weeks followed by losses. 

The story behind this is that over the last 100 years, the DJIA has appreciated more by this stage in a Macro cycle.  Periods that had the highest increases over the prior two years had the biggest decreases over the subsequent 13 weeks.  Periods with moderate increases had few decreases over the subsequent period.  

These analyses support that idea that, while the Macro MRI is influential and at a high level, a high level can be consistent with positive returns over the following weeks.  This is what the algorithms have concluded as well.   

Please feel free to contact me to discuss any of this and how the shift to more volatile returns may influence the model portfolio you are tracking.