Market Outlook and Market Resilience Index Ratings
The bear market pattern began in late 2014/early 2015. The peak of resilience occurred in March/April of 2015. The trough, at least thus far, occurred in early July 2016. The implication for US stocks is that prices may move higher from here, despite recently making new highs. I do expect some price weakness over the next few weeks. If we do not have major price declines over the next several weeks, it will indicate the beginning of a longer period of rising prices.
The Micro Market Resilience Index for US stocks is close to peaking for many assets. When it does start to decline, prices may soften. At the moment, it appears that the associated price declines will be minimal because of the presence of the Exceptional Macro MRI. The Focused 15 Investing model portfolios will likely have high equity allocations for the next few weeks.
Should the Exceptional Macro MRI also turn negative, we may see greater price declines. This is what we should be watching for over the next few weeks.
When the Micro MRI starts to move higher several weeks from now, we may see the kind of price pop we usually associate with the beginning of a new bull market.
A few months ago, I compared the current market condition to 2002. In recent weeks, the complexion of the market has shifted and now appears to be developing much more resilience than it did in 2002. Thus, that comparison is not as strong as it once was.
US Bonds
With a rating of 1 on the resilience scale, the US 10y Treasury yield
is somewhat vulnerable to declines. I expect this condition to remain in place
for the next few weeks. US 10y Treasury bond prices (not shown in graph above)
display strong resilience. Near term, resilience is abating, and prices may
ease slightly. That said, the market does not appear especially vulnerable now,
suggesting any decline in 10y bond prices will be moderate.
Credit spreads – US corporate BBB less 10y Treasury yields – are currently
rated 0, suggesting that spreads will tend to narrow.
Consistent with the above, US high-yield bonds are rated 3, or highly
resilient. All else being equal, high-yield bond prices will tend to rise.
Bottom line: US bonds, in general, and high-yield issues, in
particular, will remain attractive investments over the next few weeks.
Developed Market Stocks
With a rating of 3, US Industrial stocks, as represented by the Dow
Jones Industrial Average, will continue to display high resilience. Stock
prices will tolerate negative news and events reasonably well in the near term.
Over the last few weeks, the price declines are attributable more to a reversal
of the recent strong gains than to an absence of resilience.
UK stocks are rated 3 and have been resilient for the last several
weeks. Qualitatively, they are getting a boost from the weakening UK currency.
I do expect resilience to fade over the next few weeks, with UK stocks becoming
more vulnerable to price declines.
European stock prices have a rating of 1. While more vulnerable than
the DJ Industrial stocks, they have been finding more resilience over the last
few weeks.
Japanese stocks (not shown in graphic) also have a 1 rating.
Commodities
Overall, commodity prices remain resilient.
The S&P Goldman Sachs Commodity Index represents a basket of
commodities, with a high weighting in crude oil. The S&P GSCI has a rating
of 2. Crude oil also has a rating of 2, indicating that oil prices are
vulnerable to declines on a short-term basis. However, this looks to be a
short-term breather from price increases rather than a fundamental shift in
longer-term resilience.
Gold is vulnerable to declines on a short-term basis with a rating of
2.
Emerging Markets
Emerging market stock and bond prices continue to be resilient. EM
stocks and bonds, represented by the MSCI Emerging Markets Index and a popular
EM bond mutual fund, respectively, have ratings of 3.
I expect that the rating for EM stocks will decline over the next few
weeks.
Chinese stocks, as represented by the Shanghai Composite, have a
rating of 0, which is a new rating. Price will be vulnerable to declines.
Currencies
The Dollar index DXY is rated 0 and is vulnerable to declines.
The Euro is rated 3. I expect it to have a lower resilience rating
over the next few weeks.
GBP is rated 1, a new rating that means it is somewhat vulnerable to
declines.
