Global markets have been shaken since my note last Wednesday.
Renewed inflation concerns have caused commodities to gain in price, and stock
and bond prices to decline. The wars in the Mideast and Ukraine also have investors
on edge. For reasons discussed below, the best strategy right now is to maintain
our current positions in DJIA- and NASDAQ-linked ETFs, although I will review conditions daily.
Last Friday (April 12), the Micro MRI, which tracks the short cycles of return and indicates market resilience, was at the 10th percentile of levels since 1918. This is a very low level (note 1) and suggests that the stock market will soon experience a short-term move higher as it reverts toward its long-term mean, indicating greater resilience for the market.
It appears that our physics-based driver of short-term investor emotion has a meaningful relationship to the DJIA for the last several weeks. The figure below shows price of the DJIA (brown line) ending last Friday. It also shows the Physics-Based Driver (purple) and the Micro MRI (green).
The Driver is at a low point this week and can be expected to move higher next week. Because of the way we calculate the driver, we can forecast the Driver several weeks into the future. The next upleg of the Driver is reasonably steep. The figure also shows that at the beginning April, the DJIA (brown) and Micro MRI (green) began to move in tandem with the Driver (purple), which I discuss below.
A consistent image emerges for the current week: a) the Micro MRI (recently at the 10th percentile), and b) the upswing of the Micro Driver (purple) both indicate that the market is likely to be more resilient soon. Getting out of the market now is not prudent; doing so would miss the anticipated rebound.
The longer-term MRI (not shown) indicate that staying in the market is appropriate as well. As of last Friday, the Macro MRI is still in the upleg of its cycle and unambiguously so. The Exceptional Macro has been present for several months as well. These are reliable indicators of a positive longer-term trend in the stock market. The algorithms that evaluate the MRI also indicate that staying in the stock market is prudent.
The path of the Physics-Based Driver has been apparent for some time. In the April 10 blog post: https://marketresilience.blogspot.com/2024/04/weekly-note-april-10-2024.html, I mention an upcoming test of the stock market’s strength. We are in the middle of that test and, at least so far, it does not appear that the market will get an A+. Unfortunately, the conditions described above did not allow time to pull our money out of the stock market and then get in before the anticipated rebound.
Moving in Tandem
Historically, when the DJIA, Micro MRI, and the Physics-Based
Driver move in tandem, as apparent in the figure above, it is a warning sign for future market weakness. Generally
speaking, when the market follows the Driver, the market will decline when the Driver
inevitably moves to the downleg of its cycle, shifting from investor optimism
to pessimism.
If tandem movement continues in the current situation, we
may see the market move higher in response to the conditions described above and
then experience long-term weakness in the May/June timeframe. I will provide
additional thoughts later this week.
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Note 1 - You may recall from a recent note that the Micro
MRI made a trough in mid-March, moved higher for a week or two, and then resumed
its downleg April 4. Forming a trough and resuming the downleg of its cycle is
not uncommon and is often related to current events. That appears to be the case
in this instance. In most historical cases, the best strategy is to ride
through the decline, which is what our algorithms are programmed to do.
