High Points in the Micro MRI Cycle
Our indicators of short-term price-change cycles, the Micro MRI, are at high levels for several indexes. All else equal, prices tend to move lower after high Micro MRI readings.
As of last Friday, the Micro MRI cycles are still in the upleg of the cycle (except as noted) with very high readings. The percentile levels for ETFs and the indexes they track are:
- DDM – DJIA (major companies): Upleg at the 98th percentile of levels since 1918
- QLD – NASDAQ / NASDAQ 100 (tech companies): Downleg at the 87th percentile since 1972
- EFO – MSCI EAFE (companies in Europe, Australia and Asia): Upleg at the 92nd percentile since 1972
- IWM – Russell 2000 (small companies in the US): Upleg at the 91st percentile since 1982
The high levels for the Micro MRI for these stock indexes suggest that prices will weaken over the coming weeks. The shift this week of the NASDAQ to the downleg of the cycle may indicate the short-term positive price trend for US stocks is at an end. That said, these readings have been at high levels for several weeks, which is consistent with our expectation for positive investor sentiment described below.
Historically, stock prices have moved higher when the Micro MRI is the downleg of its cycles as long as the Macro MRI is clearly in the upleg of its cycle and/or the Exceptional Macro is present. The Exceptional is not present for the DJIA, the NASDAQ, or any of the other stock indexes we track. The condition of the Macro MRI is therefore important.
No Strong Positive Long-term Trend in the Macro MRI
For the DJIA and NASDAQ stock indexes, the Macro MRI is at high level but does not have a strong trend, either positive or negative.
Abrupt Sentiment Shifts
As you may recall, several months ago, we forecasted a period of abruptly changing sentiment to begin with a shift to positive sentiment by April of this year. That shift took place. We expected a shift to naturally occurring negative sentiment at the end of May. This shift has not been apparent yet in market prices. A review of past similar conditions suggests that a three or four week delay is not uncommon.
The two periods of naturally occurring negative sentiment that are candidates for meaningful price declines are 1) end of May through mid-July, and 2) the end of the year.
The condition of the Micro and Macro MRI and the expected abrupt negative shift are a key cause of our conservative portfolios over the last several weeks. Adding to this are the economic repercussions of the Iran conflict. Higher oil prices are leading to higher costs and inflation, which the Fed seeks to correct with higher interest rates. All of which tend to slow economic growth.
Valuations
Valuations levels such as Price-to-Earnings (PE ratio) relate current market prices to the economic activity of the companies in the index. The PE ratio tends not to determine when the stock market will fall, but it does shed light on the magnitude of a price decline that may be needed to move the ratios to more typical lower levels.
The following chart shows statistics for the S&P 500 because of its long history and easily obtained historical data. For the PE ratio, the chart below shows the Shiller PE (https://www.multpl.com/shiller-pe), which is good for long-term historical comparisons. It is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio).
The important point of this chart is that the current PE ratio of the S&P 500 (31.98) is as of June 2026, far above the historical median value (15.08). Stock prices are expensive by historical standards. High levels of this ratio tend to occur after euphoric periods (Roaring 20s, Post War Boom, and Dotcom Boom) and before major stock price declines (Crash of 1929, Dotcom Bust, and Global Financial Crisis.
There are other measures of stock valuation, such as Price-to-Sales and Price-to-Book ratios. These also show that the current prices are high compared to the economic fundamentals of the companies in the index.
There may be economic dynamics that will ultimately justify what we observe in the figure above. But the conclusion that stocks are currently very expensive is consistent with the objective metrics that determine the MRI.
No Strong Positive Long-term Trend in the Macro MRI
For the DJIA and NASDAQ stock indexes, the Macro MRI is at high level but does not have a strong trend, either positive or negative.
- DDM – DJIA (major companies): 76th percentile
- QLD – NASDAQ / NASDAQ 100 (tech companies): 86th percentile
Abrupt Sentiment Shifts
As you may recall, several months ago, we forecasted a period of abruptly changing sentiment to begin with a shift to positive sentiment by April of this year. That shift took place. We expected a shift to naturally occurring negative sentiment at the end of May. This shift has not been apparent yet in market prices. A review of past similar conditions suggests that a three or four week delay is not uncommon.
The two periods of naturally occurring negative sentiment that are candidates for meaningful price declines are 1) end of May through mid-July, and 2) the end of the year.
The condition of the Micro and Macro MRI and the expected abrupt negative shift are a key cause of our conservative portfolios over the last several weeks. Adding to this are the economic repercussions of the Iran conflict. Higher oil prices are leading to higher costs and inflation, which the Fed seeks to correct with higher interest rates. All of which tend to slow economic growth.
Valuations
Valuations levels such as Price-to-Earnings (PE ratio) relate current market prices to the economic activity of the companies in the index. The PE ratio tends not to determine when the stock market will fall, but it does shed light on the magnitude of a price decline that may be needed to move the ratios to more typical lower levels.
The following chart shows statistics for the S&P 500 because of its long history and easily obtained historical data. For the PE ratio, the chart below shows the Shiller PE (https://www.multpl.com/shiller-pe), which is good for long-term historical comparisons. It is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio).
The important point of this chart is that the current PE ratio of the S&P 500 (31.98) is as of June 2026, far above the historical median value (15.08). Stock prices are expensive by historical standards. High levels of this ratio tend to occur after euphoric periods (Roaring 20s, Post War Boom, and Dotcom Boom) and before major stock price declines (Crash of 1929, Dotcom Bust, and Global Financial Crisis.
There are other measures of stock valuation, such as Price-to-Sales and Price-to-Book ratios. These also show that the current prices are high compared to the economic fundamentals of the companies in the index.
There may be economic dynamics that will ultimately justify what we observe in the figure above. But the conclusion that stocks are currently very expensive is consistent with the objective metrics that determine the MRI.
