MRI TRENDS
In the current situation, the short-term dynamics of the stock market tracked by the Micro MRI lack strong direction. In similar historical conditions, it has been best to take money out of the stock market for a few weeks and let a stronger trend develop. When the market has lacked a strong direction, it most often has led to the market moving lower.
This lack of direction contrasts with a more common situation when one or more of our MRI begins the downleg of its cycle at a very high level. We see these situations when an MRI is at a high level of, say, the 70th percentile or higher and shifts to the downleg of its cycle and has a negative slope. Based on the high percentile, the downleg tends to have a strong direction.
As of last Friday, the Micro MRI for the DJIA was at about the 41st percentile of levels since 1918, which is roughly mid-level. It has been at about this level for approximately a month and has had both a positive and negative slope over that time. In Figure 1 below, the yellow ellipse shows the horizontal trend of the Micro MRI over the last month.
Figure 1 – ETF DIA (Tracks the DJIA)
Source: CPM Investing LLC
It is this horizontal trend that has historically been followed by market price declines in most, but not all, cases.
Also in Figure 1, we see that the Macro MRI is at the 70th percentile and currently registers as being in the upleg of its cycle (“pos”= positive slope). It shifted to a positive slope from a negative slope over the last three weeks. Thus, it too has lacked clear direction over recent weeks.
As mentioned, the target weights are determined by an analysis of current dynamics compared to market history. For a look into the future, we now have the drivers of investor sentiment that highlight periods of naturally occurring optimism and pessimism. Historically, major market declines occur during periods of naturally occurring pessimism.
These drivers indicate that the market is likely to become more pessimistic in approximately the month of March (plus or minus a week or so). During this period, investors are likely to have the most pessimistic bias compared to recent months. Naturally occurring optimism will begin in roughly April. Thus, if there is an economic need for a price decline, March (roughly) will be the most vulnerable month in the early part of 2025.
VALUATIONS
One measure of an economic need for a stock market price decline is valuations. Figure 2 below shows the Price/Earnings ratio for the S&P 500 since records began in 1874.Figure 2 – S&P 500 Price/Earnings Ratio
Source: https://www.multpl.com/s-p-500-pe-ratio/table/by-month
At the far right is the most recent reading of 30.7. This is high by historical standards, although not at the highest levels. The Price/Earnings ratio decreases when the price drops and earnings stay the same, or when the price stays the same and earnings increase. Thus, high Price/Earnings ratios are often followed by stock prices that stay roughly the same or decline. Thus, a conservative stance makes sense.
INFLATION
Inflation is spiking, which tends to boost the prices of commodities. Thus, our commodities ETF “COM” has a higher weight. High inflation tends to hurt bond prices and, as a result, our bond ETF “UST” has a slightly lower weight.
Inflation also tends to result in higher stock prices because companies pass on to customers the higher prices of what they need to produce their products. Thus, if inflation continues, we could see the stock market becoming more resilient.
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