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.
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.
