Weekly Note - December 30, 2020

Market Resilience Index series - DJIA  

The DJIA continues to be resilient. The main Market Resilience Indexes, their directions, and levels (in terms of percentile within all weekly levels since 1918, except for the Exceptional Macro) are listed below:
  • Macro: Positive leg of cycle and moving higher; providing resilience. Currently at a low level in its cycle (34th percentile, up from 32nd last week)
  • Exceptional Macro: Present and providing strong resilience
  • Micro: Negative leg of cycle and moving lower; no longer providing resilience. Currently at a high level in its cycle (72nd percentile, down from 78th last week)

Market Comment 

As of last Friday (12/25/2020), two of the three main MRI listed above (i.e., Macro and Exceptional Macro) were providing resilience for the DJIA. If historical precedents hold true, the market will recover reasonably quickly and completely from news-related losses that may occur. There is a good chance (slightly greater than 50%) of the DJIA moving higher, despite a Micro MRI being the downleg of its cycle. This is because the Exceptional Macro is present and its strength can compensate for the lack of resilience from the Micro MRI. We have seen evidence of this phenomenon last week and so far this week – the DJIA is not declining even though the Micro MRI is the in the downleg of its cycle.  

However, the next roughly six weeks are likely to be more volatile for the DJIA (i.e., rapid price moves up and down) than it has been over the last roughly six weeks. While there is less than a 50% chance of overall declines over this period, there is still enough of a chance that we should not ignore the possibility that the DJIA will be at a lower level in six weeks. Thus, the suggested additional cash for Box #2 Cash for those with shorter investment horizons, as indicated above in section C of the weekly email, until we get further through the downleg of the Micro MRI.

Regarding the MRI conditions of global markets, many of the major stock markets are in a similar situation as the DJIA – a Macro MRI that has just moved to the upleg of its cycle, the strong presence of the Exceptional Macro MRI, and a Micro MRI that has just moved or will soon move to the downleg from a very high level. This applies to these markets: S&P 500, MSCI World Stocks (MXWO), US Industrial Stocks (S&P and DJ), US Transports, Energy Stocks (SPGS), US Small Company Stocks (Russell 2000), UK Stocks, Europe Stocks, Emerging Market Stocks, Shanghai Stocks (in USD).

This statement also applies to Bitcoin, and several commodities (excluding precious metals). Contributing to these conditions is that the US dollar continues to lack any source of resilience. The US dollar is very vulnerable to continued declines. 

The obvious omission from this group is the NASDAQ stock index. It’s Macro MRI is currently in the downleg of its cycle and is not providing resilience.

It looks like 2021 is starting with a wide range of very resilient markets, which would present a welcome change from 2020. The short-term vulnerability of the Micro MRI for these markets over the first several weeks of the year may induce some additional concerns. Should those concerns pass without negatively influencing investors globally, we will likely see global markets move quickly higher.