US Bonds
Market Resilience Index Ratings
For Week of…
|
8/8/2016
|
8/1/2016
|
7/25/2016
|
7/18/2016
|
US 10y Treasury Yield
|
1
|
1
|
0
|
0
|
US 10y Treasury Futures
|
2
|
2
|
2
|
3
|
Credit Spreads
|
0
|
0
|
0
|
1 v
|
High-Yield Bond Prices
|
3
|
3
|
3
|
2 ^
|
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.
By the same token, US 10y Treasury bond prices 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
Market Resilience Index Ratings
For Week of…
|
8/8/2016
|
8/1/2016
|
7/25/2016
|
7/18/2016
|
DJ Industrial stocks
|
3
|
3
|
2 ^
|
2 ^
|
DJ Transportation stocks
|
2
|
2
|
1 ^
|
1 ^
|
UK Stocks (UKX in GBP)
|
3 v
|
3
|
3
|
3
|
European stocks (SPE in EUR)
|
1
|
1
|
1
|
0
|
Japanese stocks (TPX in JPY)
|
1
|
1
|
1 ^
|
0 ^
|
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 also have a 1 rating.
Bottom line: Overweight US Industrial stocks, underweight European and
Japanese stocks.
Commodities
Market Resilience Index Ratings
For Week of…
|
8/8/2016
|
8/1/2016
|
7/25/2016
|
7/18/2016
|
S&P GSCI
|
2
|
2
|
2
|
2
|
Crude oil (WTI )
|
2
|
2
|
2
|
2
|
Gold
|
2
|
2
|
3
|
3
|
Copper
|
3
|
3
|
3
|
3
|
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. Copper, meanwhile, continues to be resilient with a rating of 3. Prices may
soften near term, but longer-term resilience forces remain decidedly positive
for the two metals.
Bottom line: Overweight commodities, in general, and gold and copper,
in particular.
Emerging Markets
Market Resilience Index Ratings
For Week of…
|
8/8/2016
|
8/1/2016
|
7/25/2016
|
7/18/2016
|
EM stocks (MSCI MXEF in USD)
|
3 v
|
3
|
3
|
3
|
EM bonds (FNMIX in USD)
|
3
|
3
|
3
|
3
|
Shanghai Comp (CNY)
|
1 v
|
1
|
1
|
1
|
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 1. There is minor support for higher prices, but this could prove
fleeting in the absence of resilience from longer-term forces. I expect that
the rating for Shanghai Composite stocks will decline over the next few weeks.
Currencies
Market Resilience Index Ratings
For Week of…
|
8/8/2016
|
8/1/2016
|
Dollar (DXY)
|
0
|
1
|
EURUSD
|
3 v
|
3
|
GBPUSD
|
0 ^
|
0
|
USDJPY
|
1
|
1
|
The Dollar index DXY is now rated 0, and is vulnerable to declines. It
has a resilience rating of 0, down from a 1 the prior week.
The Euro is rated 3. I expect it to have a lower resilience rating
over the next few weeks.
GBP is rated 0, meaning vulnerable to declines. I expect it to have a
higher resilience rating over the next few weeks.
The USDJPY rate is somewhat vulnerable to declines. A declining USDJPY rate means strengthening
JPY.
Plausible
Narrative
A plausible narrative that accommodates the broad set of MRI ratings
across asset classes is...
Despite positive signs in the US, the global economy is struggling.
There is high uncertainty about the political situations in the US, UK, and
Europe. The best quick-fix remedy for all our ills is a mix of low interest
rates and calming voices from the Federal Reserve’s Janet Yellen and her
counterparts around the world. Globally, the US Fed has the most potent
medicine, and it is needed. However, the US actually has the least need for it.
We in the US will benefit more if the medicine is administered globally. 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 also be plausible
·
When the bottom-up resilience data
suggests a change in the narrative, that change will be made
·
The narrative does not affect the
analysis of market resilience or the target weights in the model portfolios
Focused 15 Investing model portfolios are positioned according to a
wide range of MRI ratings. However, the guideline is consistent across all
markets – overweight the resilient, underweight the vulnerable.
Please contact me with questions or comments in the tab above.
