Yen Resilience for the Week of 7/18/2016

The Japanese yen, will continue to be resilient over the next few weeks. Compared to a basket of currencies, the yen has a resilience rating of "3," the highest level of resilience.

The yen may then be less resilient and for several weeks. The forces that are providing much of its resilience appear at this time to be longer term in nature.

 

Emerging Market Resilience for Week of 7/18/2016

Emerging market stocks and bonds remain resilient.  The prices of both are likely to tolerate negative news and events relatively well in USD terms.

Emerging market stocks, as measured by the MSCI Emerging Markets Index, has an MRI rating of "3," the highest level.

Emerging market bonds, as measured by a popular EM bond mutual fund, also has a MRI rating of "3."

For both, the longer term resilience forces are strong and decidedly so.  I expect these positive resilience ratings to last for several weeks.

Commodity Resilience for Week of 7/18/2016

Overall, commodity prices are resilient.

The S&P Goldman Sachs Commodity index represents a basket of commodities but has a heavy weight in crude oil.  The SPGSCI has a MRI rating of "2." This a relatively new rating (down from a "3"). Oil prices are more vulnerable on a short term basis. This appears, however, to be a temporary breather as opposed to a fundamental shift away from oil prices being very resilient.

Gold has a MRI rating of "3."  While there may be some softening of gold prices in a week or so, the the longer term resilience forces are decidedly positive at this time.

Copper has a MRI rating of "3" as well.  At the moment, the longer term resilience forces appear strong.

Bottom line:  Overweight commodities in general, particularly gold and copper.

Stock Market Resilience for Week of 7/18/2016

US stocks, as measured by the Dow Jones Industrial Average, are moderately resilient with a MRI rating of "2." This suggests that US stock prices will be able to tolerate negative news and events reasonably well over the near term.  Stock prices will tend to move higher, all else equal.

European stock prices have a MRI rating of "0," meaning least resilient. This suggests that prices are likely to fall with negative news and struggle to recover.   Some elements of resilience are cyclical and European stocks are nearing a low point in a key resilience force.  We may see an upgrade in its MRI rating over the next month or so.

Japanese stocks also have a resilience rating of "0," meaning least resilient (most vulnerable).  Price may fall with negative news.  Japanese stock prices are closer to a shifting to a higher MRI rating than are European stocks.

For both European and Japanese stocks, prices may increase with good news, such as additional economic stimulation from policy makers.  This may precipitate a shift to higher resilience (such as a MRI rating of "1").  But increases resulting from good news may also prove temporary until the MRI rating increases.  

Bottom line:  Overweight US industrial stocks, underweight European and Japanese stocks.

Bond Resilience for Week of 7/18/2016

The US 10y Treasury bond yield is currently vulnerable to declines (rating of "0" on a Resilience scale of  0 to 3) and I expect yields to remain vulnerable to declines for the next few weeks.  Prices for US 10y Treasury Bonds will therefore tend to move higher.

Credit spreads (as measured by the US Corporate BBB - 10-Yr Treasury Spread) currently have low resilience (MRI rating of "1").  Based on current market dynamics, I expect the resilience rating to decline to a "0" over the next few weeks.  This means that credit spreads will tend to narrow.

Consistent with these two views, US high yield bonds are currently rated as moderately resilient (rating of "2"), and may soon be increased to a rating of "3." This is the highest resilience rating and suggests that high yield bond prices will be able to tolerate negative economic news and events relatively well.  High yield bond prices will tend to rise, all else equal.

Bottom line:  US bonds in general and US high yield bonds in particular will continue to be attractive investments for the next few weeks.

For Week of 7/11/2016

US 10 year Bond Prices to Remain Resilient,

US Stock Prices to Remain Moderately Resilient

These comments are based on a four to six week horizon.

US 10-year bond prices are resilient and can be expected to remain high for the time being. On a Market Resilience Index scale of 0 to 3, with 3 being the most resilient, US 10-year bonds are rated “3.”

Similarly, yields on the US 10 year bonds are “0” on the MRI scale. We can expect yields to stay low and even decline over the next few weeks. While the current yields are very low, they can go lower, as yields have done elsewhere in the world. Portfolios should be prepared for this possibility.

US large company stocks, such as those in the Dow Jones Industrial Average and the S&P500 are moderately resilient, at a “2” on the MRI scale. These may develop a higher resilience rating over the next few weeks. Stock prices will get battered with news of the day, including all the repercussions of the Brexit vote. I do not make an effort to forecast these events or their outcomes.  I just forecast the market’s ability to tolerate bad news. For now, it is moderately high and is likely to improve over the next few weeks.

The commodity market, as measured by the SPGSCI, is also moderately resilient, with a “2” on the MRI scale. I do expect commodities prices to soften over the next few weeks. However, those declines appear right now to be temporary and likely to be followed by higher prices in 6 to 9 weeks.

Other stock markets are not in the same condition as the US stock market. The European stock market is a “0” on the 0 to 3 MRI scale. The Japanese stock market is a “0” as well. The UK stock market is more resilient and is benefiting, at least for now, from the weaker UK currency.

Markets that go up in times of stress are showing high resilience. Gold is a “3” on the MRI scale. The Japanese Yen, which typically goes up in times of stress, is also a “3” on the MRI scale. There is an index called “VIX” and it is a “2” on the resilience scale. These are stressful readings. However, I do see emerging signs of stress reduction behind some of the ratings.

A Plausible Narrative

A plausible narrative that makes sense of the broad set of MRI ratings across asset classes goes like this...

The global economy is struggling, there is confusion over Brexit, and political uncertainly in the US and other major markets. The best quick-fix remedy for all our ills is a mix of low interest rates and a calming voice from the Federal Reserve’s Janet Yellen. The US Fed has the strongest medicine globally, and it is needed. However, the US is in the least need of the medicine. Therefore, we in the US will benefit from the strong medicine being administered globally, and benefit more than we alone need. For the time being, this will result in greater resilience for US stocks and bonds.

Please note:

• The disciplined analysis of market resilience drives this narrative
• Other narratives may be equally plausible
• When the bottom-up resilience data suggests a change in the narrative, that change will be made and made quickly
• The narrative does not affect the analysis of market resilience  

Focused 15 Investing model portfolios will be positioned according to the MRI ratings – overweight the resilient, underweight the vulnerable.

Please contact me with questions or comments in the tab above.

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