Weekly Note - July 17, 2026

We are getting closer to a likely shift to a more resilient market, at least over the short-term. This is best indicated by the Micro MRI for the various indexes that our stock ETFs track.

    DJIA / DDM:                                                Downleg, at the 46th percentile last Friday.
    NASDAQ / QLD:                                           Downleg, at the 21st percentile
    Europe, Australia, Far East / EFO                 Downleg, 53rd percentile

The NASDAQ appears closest to a shift to the upleg. Generally, moderately aggressive downlegs lose about 10 percentile points each week. If this is true for the current market, the NASDAQ could begin the upleg of its Micro MRI cycle in a week or so. However, historically it is most prudent to wait for the shift to its upleg to take place before entering the market. This is because abrupt declines often occur at the ends of downlegs. Thus, our portfolios are likely to remain conservative in the near term. Our portfolios will likely become more aggressive after the indexes shift to the uplegs of their Micro cycles.

The timing of a potential shift to the upleg of the Micro MRI cycle in a few weeks is consistent with the expected development of greater naturally occurring resilience. As you may recall, we forecasted greater naturally occurring vulnerability from later May through late July. We then expect a period of resilience that could last several months. After the period of naturally occurring resilience, we expect a new period of vulnerability later in the year.

Continued Directionless Long-Term Trend as Indicated by the Macro MRI

The Macro MRI measures the long-term direction of the market’s price moves and continues to lack clear direction. However, the underlying dynamics that determine the Macro MRI are tilting more heavily toward a negative long-term trend. Because of these dynamics, there is good chance that any short-term move higher will NOT become readily turn into a long-term positive price trend. 

Setting aside the issue of the ultimate long-term trend of the market, there is likely to be a good buying opportunity over the next few weeks for the NASDAQ and likely the other indexes. Thus, switching to a more aggressive portfolio at that time could make sense.

Assessing the Potential for Longer-Term Stock Market Declines

While not a formal part of the F15 process, stock market valuations can give insights into the potential for large losses. The figures below are from my notes a few weeks ago and show current stock market Price-to-Earnings ratios. By most of these measures, the market is currently expensive.

Figure 1 below shows the Price-to-Earnings for the DJIA from the early 1990s to the current date. The current ratio is about 25, which is close to the level during the internet boom of the late 1990s. Although it is lower than it was from 2023 through early 2025 (https://worldperatio.com/).

Figure 1 – DJIA Price-To-Earnings Ratio



The DJIA tends to have lower exposure to the technology sector than the S&P 500. We see the difference in the Price-to-Earnings ratio of the S&P 500.

Figure 2 shows the period from the late 1870s to the current date, a 100+ year history. The current ratio is 27, which places it higher than at any point over that period.

Figure 2 – S&P 500 Price-To-Earnings Ratio



The ratios described above do not consider prevailing inflation rates, interest rates, and corporate profitability. The Schiller P/E ratio, developed by respected economist Robert Shiller, reflects current economic conditions of different periods. The current Shiller P/E is close to an all-time high, as shown in Figure 3 below, spanning from the late 1870s to the present. It is lower than only the peak of the dot-com bubble of the late 1990s.

Shiller Price-To-Earnings Ratio for the S&P 500

The Shiller P/E divides the current price of the S&P 500 by the average of the last 10 years of earnings, adjusted for inflation. This metric is used to smooth out the fluctuations of corporate profits during business cycles, offering a long-term perspective on market valuation. (https://www.multpl.com/shiller-pe)

Figure 3 - Shiller Price-To-Earnings Ratio for US Stocks


The current valuation measure of the stock market based on the Shiller P/E suggests the market is very expensive.

High stock valuations suggest that investors believe that earnings will experience abnormally high growth over the next few years. The current high valuations are driven by AI stocks, which investors have assumed will accelerate earnings growth. While earnings growth may accelerate, investor expectations are extremely high. Should growth be lower than expectations, price declines may be dramatic.

We see the dramatic reactions in the historical record. After the dot-com bubble peaked and ended (2000–2002), the S&P 500 lost about 49% of its value and the Dow Jones Industrial Average (DJIA) dropped roughly 38%. During the Global Financial Crisis (2007–2009), the S&P 500 fell by 57% and the DJIA lost 54%.

The technology-based NASDAQ index dropped 78% from March 2000 through October 2002 during the collapse of the internet and dot-com bubble. It dropped 56% during the Global Financial Crisis, from 2008 through early 2009.

High stock valuations and the lack of strong direction in the Macro MRI make caution prudent for investors with investment horizons of several years or less.

Conclusion

There is likely to be a good opportunity to shift to a more aggressive portfolio (using F15 or another strategy) over the coming weeks. A move higher in stock prices is becoming more likely, but it may not be long lasting. At the moment, there is a slightly less than even chance that the short-term move higher will develop into a new positive long-term trend. But market dynamics could change over the next few months and make gains more likely. Please reach out with any questions.

Weekly Note - July 8, 2026

In September 2025, we developed a forecast of investor sentiment for 2026. The forecast identified three periods of investor euphoria that are shown as columns in the figures below. We call each period an Anxiety-Free Period, or AFP.  The first AFP has now ended, so we can begin evaluating how the forecast is performing and what it implies for the remaining two AFPs in 2026. 

The AFP forecasts are based on physics-based drivers of investment sentiment that are described in this paper, which I published September of 2025:

      https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5482086

The AFPs are based on expected solar energy variation and were developed without any stock market or economic information.  Yet, they are correlated to important inflection points in our Market Resilience Indexes, as discussed in the paper linked above.  AFPs are rare events. There have been 13 clusters of AFPs since 1935.  The last one occurred in 2017/8. The next one is expected to take place in 2033. In addition, they are abrupt. 

An understanding of these AFPs is relevant to Focused 15 Investing. Because the AFPs are rare and abrupt, when they have occurred, the F15 algorithms have not navigated all of them well.  The clearest example of the impact of a cluster of AFPs is the Crash of 1987. The crash was preceded by three AFPs. The market crash – a loss of 23% in one day - occurred just after the end of the final AFP in the cluster.  The three AFPs prior to the 1987 Crash coincided with a 44% price gain for the DJIA 12 months prior to the crash.  After the peak in price, the DJIA lost 30% over the next month.  The NASDAQ Composite gained 25% in the year prior to its peak in 1987.  It lost 25% over the subsequent month.  For both indexes, much of the prior year’s gain was lost within a month of the peak.

The 1987 AFPs were the most intense AFPs over the last 90 years.  Several smaller AFPs have occurred at other times during that period, and our algorithms have navigated successfully the medium and small AFPs. However, our analysis suggests that the 2026 AFP cluster is unusually strong, with an estimated intensity of about 80% of the 1987 AFP cluster. 

As of July 6, 2026, the one-year gains for the DJIA are about 20% and the gains for the NASDAQ 100 are about 31%. These gains are as not strong as those of the 1987 period. However, stock valuations are far higher now than they were in 1987 (as discussed in a prior blog post: https://marketresilience.blogspot.com/), which suggests less tolerance for disappointment and a greater risk of a price adjustment. Thus, caution is appropriate. 

Investor Euphoria During the 2026 AFPs

Based on our research conducted over the last several years, we created the forecast of this year’s cluster of AFPs and published the forecast in September 2025.  The first AFP of this cluster ended recently.  Thus, we can begin to evaluate the forecast objectively. A complete analysis will need to wait until after the final AFP of this cluster ends in December of 2026.  Thus, this analysis is preliminary. 

During an AFP, investor anxiety is expected to be unusually low, making markets more susceptible to euphoria-driven advances and later market losses. The three AFPs of the 2026 cluster are shown in Figure 1. The height of each AFP column reflects the expected relative intensity of the sentiment effect. The first AFP of the 2026 cluster is expected to be the most intense of the three. 

Figure 1

In prior AFP clusters, the stock market has often reached a major price peak sometime between the beginning of the first AFP and the end of the last AFP. The price peaks tend to occur close to the peaks of the AFP cluster.  In the 2026 cluster, the overall peak was forecast to be in late May, as indicated by the highest point across the three columns shown above. 

We track sentiment using Market Resilience Indexes, or MRI. These metrics measure stock index price acceleration, which we use as an indicator of whether investors are becoming more optimistic or more pessimistic in responding to prevailing economic and market news.  Figure 2 shows short-term price acceleration, as indicated by the Micro MRI, for non-levered ETFs tracking major US stock market indexes from the beginning of 2026 through July 3, 2026.

Figure 2

 

The vertical red line marks the beginning of the Iran conflict, on February 27, 2026. Falling Micro MRI readings indicate weakening short-term price acceleration and greater vulnerability to declines in response to negative news. Rising readings indicate strengthening short-term price acceleration.

Many MRI readings were already moving lower before the start of the Iran conflict, indicating that investors were becoming more likely to react aggressively to any negative news.  All the major index MRI readings reached extremely low levels in March.

Consistent with the September forecast, the market entered a period of unusually high investor optimism in April. The most apparent driver was the AI theme, best represented by QQQ (tracking the NASDAQ 100). However, Micro MRI readings rose sharply across all major index ETFs, suggesting the rapid shift to optimism was broader than AI alone.

The strongest AI-related price gains ended shortly after the first AFP peaked, as shown by the decline in the QQQ Micro MRI and the subsequent weakening in QQQ price performance. That pattern is consistent with the September forecast.

The Micro MRI positions in their cycles are:

    DJIA: Downleg at the 65^th percentile of levels since 1918

    S&P500: Downleg at the 50^th percentile since 1931

    NASDAQ 100: 44^th percentile since 1972

    Russell 2000: 78^th percentile since 1983

Most readings are no longer at extremely high levels, although the Russell 2000 remains relatively elevated.  If the current pace of declines continues, the Micro MRI will reach lower extremes in the next few weeks.  An inflection point at which the Micro MRI moves higher would indicate more resilience for the market.  Stock market prices would then likely move higher. This pattern would be consistent with the forecast we made 9 months ago.  

The current period between the first two AFPs, with Micro MRI readings trending lower, is a period in which the market is more vulnerable to declines in response to negative economic, earnings, or geopolitical news. If economic conditions require a price adjustment, this is the type of period in which that adjustment is likely to begin. That pattern would be consistent with our view that economic conditions heavily affect the magnitude of price moves, while physics affects the timing. 

Figure 3 shows ETF performance over the same period. QQQ/NASDAQ moved lower after the peak of the first AFP, while the DIA/DJIA has continued to move higher.

Figure 3

The DJIA, which has relatively little exposure to the AI theme, has continued to move higher during this period. The S&P 500, with greater exposure to AI and technology stocks, has weakened since the price peak that occurred shortly after the first AFP.

The DJIA’s continued advance, despite a declining Micro MRI, suggests that a positive medium-term trend may be developing. As of last Friday, neither the Macro MRI nor the Exceptional Macro MRI had confirmed that trend, although the Exceptional Macro was close to being triggered.

Possible explanations for the lack of stronger Macro confirmation are: 1) the Iran conflict in March and early April may have depressed the MRI readings, and 2) the DJIA’s limited participation in the AI-driven advance may mean that investors do not yet perceive its price level as excessive.

The upcoming naturally vulnerable periods that are candidates for price declines are:

-          Now to the end of July, before the second AFP begins.  This period of vulnerability is consistent with Micro MRI readings having recently been elevated and now trending lower. 

-          October and early November, which is between the second and third AFPs of the current cluster.  Since this period lasts just a month, it may not result in sustained declines.

-          The end of December, after the third and final AFP. 

During these periods, investors may react more aggressively to negative news.  Negative news may result from Iran negotiations, a more hawkish Federal Reserve policy to fight inflation, geopolitical tension, and concerns about the economics of AI investments. 

Market behavior so far in 2026 has been consistent with the forecast made in September of last year. Investor optimism increased sharply into the first AFP, the strongest AI-related gains faded soon after that AFP peaked, and the current decline in Micro MRI readings indicates that the market has entered a more vulnerable period before the second AFP begins. The window for a major July decline is narrowing, but the market remains in a vulnerable period before the second AFP begins. The next major candidates for meaningful declines occur later in the year. 

Weekly Note - June 17, 2026

The DJIA is at an all-time high, and the NASDAQ is slightly lower than its all-time high. In addition, the current high levels of the important MRI cycles are extreme by historical standards. This is not the time to be aggressive in our portfolios. The following sections highlight the rationale behind this view.

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 Micro MRI for the NASDAQ index peaked June 5 at the 89th percentile. Generally, a level at the 85th percentile is considered high and suggests a shift to the downleg of the cycle may occur at any time.

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.

• DDM – DJIA (major companies): 76th percentile
• QLD – NASDAQ / NASDAQ 100 (tech companies): 86th percentile

At present, the data that drives the Macro MRI suggest that they are more likely to develop a negative trend rather than a positive trend.

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.