Market Resilience Ratings for Week of 7/25/2016

In the sections that follow, I provide an update on Market Resilience Index (MRI) for key asset classes.

The ratings range from 0-3, with 3 being the highest.  The symbol “^” means that the rating is likely to move higher (becoming more resilient).  They symbol “v” means the rating is likely to move lower (becoming more vulnerable).

Sections

                US Bonds

                Developed Market Stocks

                Commodities

                Emerging Stocks and Bonds 

The tables in each section detail the current and prior week ratings; the accompanying text reflects the updated outlook.

US Bonds

Market Resilience Index Ratings

For Week of…	7/25/2016	7/18/2016
US 10y Treasury yield	0	0
US 10y Treasury futures	2	3
Credit spreads	0	1 v
High yield bond prices	3	2 ^

With a 0 rating on the resilience scale, the US 10y Treasury yield is 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, although the rating for the futures counterpart (TY1) has fallen to 2 this week. Near term, resilience is abating and prices may ease slightly. That said, the market does not appear especially vulnerable now, suggesting any decline will be moderate.

Credit spreads–US corporate BBB less 10y Treasury yields–are currently rated 0, down from 1 in the prior week, as anticipated, suggesting that spreads will narrow.

Consistent with the above, US high yield bonds are now rated 3, or highly resilient, up from 2 previously, again as expected. All else being equal, 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…	7/25/2016	7/18/2016
DJ Industrial stocks	2 ^	2 ^
DJ Transportation stocks	1 ^	1 ^
European stocks (SPE)	1	0
Japanese stocks (TPX)	1 ^	0 ^

With a rating of 2, US stocks, as represented by the Dow Jones Industrial Average, display moderate resilience, suggesting that prices will tolerate negative news and events reasonably well in the near term. 

European stock prices have a rating of 1, up from 0 the prior week.  While more vulnerable than the DJ Industrial stocks, they are finding more resilience.  Some elements of resilience are cyclical and a key European stock resilience force is nearing a low in its cycle. Consequently, we may see a rating upgrade over the next month or so.

Japanese stocks also have a 1 rating, up from 0 the prior week.  That said, they are closer to experiencing a shift to a higher rating than are European stocks.

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

Commodities

Market Resilience Index Ratings  

For Week of…	7/25/2016	7/18/2016
SPGSCI	2	2
Crude oil (WTI )	2	2
Gold	3	3
Copper	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 SPGSCI has a rating of 2, down from 3 previously over the last few weeks, reflecting the fact that oil prices appear vulnerable on a short-term basis. However, this looks to be a short-term breather to price increases rather than a fundamental shift in longer-term resilience.

Gold and copper, meanwhile, continue to be resilient, with ratings of 3 for both. 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…	7/25/2016	7/18/2016
EM stocks (MSCI MXEF)	3	3
EM bonds (FNMIX)	3	3

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.

In both cases, longer-term resilience forces are robust–and decidedly so. I expect this condition to remain in effect for several weeks. They will likely tolerate negative news and events fairly well.

Plausible Narrative

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

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, calming voices from the Federal Reserve’s Janet Yellen and her counterparts around the world. 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 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 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.

Market Resilience Ratings for Week of 7/25/2016

The ratings range from 0-3, with 3 being the highest.  The symbol “^” means that the rating is likely to move higher (becoming more resilient).  They symbol “v” means the rating is likely to move lower (becoming more vulnerable).

Sections 

                US Bonds

                Developed Market Stocks

                Commodities

                Emerging Stocks and Bonds 

The tables in each section detail the current and prior week ratings; the accompanying text reflects the updated outlook.

US Bonds

Market Resilience Index Rating

For Week of…	7/25/2016	7/18/2016
US 10y Treasury yield	0	0
US 10y Treasury futures	2	3
Credit spreads	0	1 v
High yield bond prices	3	2 ^

With a 0 rating on the resilience scale, the US 10y Treasury yield is 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, although the rating for the futures counterpart (TY1) has fallen from 3 to 2 this week. Near term, resilience is abating and prices may ease slightly. That said, the market does not appear especially vulnerable now, suggesting any decline will be moderate.

Credit spreads–US corporate BBB less 10y Treasury yields–are currently rated 0, down from 1 in the prior week, as anticipated, suggesting that spreads will narrow.

Consistent with the above, US high yield bonds are now rated 3, or highly resilient, up from 2 previously, again as expected. All else being equal, 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 Rating

For Week of…	7/25/2016	7/18/2016
DJ Industrial stocks	2 ^	2 ^
DJ Transportation stocks	1 ^	1 ^
European stocks (SPE)	1	0
Japanese stocks (TPX)	1 ^	0 ^

With a rating of 2, US stocks, as represented by the Dow Jones Industrial Average, display moderate resilience, suggesting that prices will tolerate negative news and events reasonably well in the near term. All else being equal, prices will tend to move higher.

European stock prices have a rating of 0, signaling that they are vulnerable. This suggests prices will likely fall with negative news and struggle to recover. Some elements of resilience are cyclical, however, and a key European stock resilience force is nearing a low in its cycle. Consequently, we may see a rating upgrade over the next month or so.

Japanese stocks also have a 0 rating and prices may fall in response to negative news. That said, they are closer to experiencing a shift to a higher rating than are European stocks.

In either case, prices may move higher on good news, such as additional accommodation by policymakers.  This may correspond to a rise in resilience (e.g., rating of 1).  However, news-driven price increases in the absence of higher resilience could prove temporary.   

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

Commodities

Market Resilience Index Rating

For Week of…	7/25/2016	7/18/2016
SPGSCI	2	2
Crude oil (WTI )	2	2
Gold	3	3
Copper	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 SPGSCI has a rating of 2, down from 3 previously over the last few weeks, reflecting the fact that oil prices appear vulnerable on a short-term basis. However, this looks to be a short-term breather to price increases rather than a fundamental shift in longer term resilience.

Gold and copper, meanwhile, continue to be resilient, with ratings of 3 for both. 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 Rating

For Week of…	7/25/2016	7/18/2016
EM stocks (MSCI MXEF)	3	3
EM bonds (FNMIX)	3	3

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.

In both cases, longer-term resilience forces are robust–and decidedly so. I expect this condition to remain in effect for several weeks. They will likely tolerate negative news and events fairly well.

Plausible Narrative

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

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, calming voices from the Federal Reserve’s Janet Yellen and her counterparts around the world. 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 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 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.

Market Resilience Ratings for Week of 7/25/2016

The ratings range from 0-3, with 3 being the highest.  The symbol “^” means that the rating is likely to move higher (becoming more resilient).  They symbol “v” means the rating is likely to move lower (becoming more vulnerable).

Sections 

                US Bonds

                Developed Market Stocks

                Commodities

                Emerging Stocks and Bonds 

The tables in each section detail the current and prior week ratings; the accompanying text reflects the updated outlook.

US Bonds

Market Resilience Index Rating

For Week of…	7/25/2016	7/18/2016
US 10y Treasury yield	0	0
US 10y Treasury futures	2	3
Credit spreads	0	1 v
High yield bond prices	3	2 ^

With a 0 rating on the resilience scale, the US 10y Treasury yield is 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, although the rating for the futures counterpart (TY1) has fallen from 3 to 2 this week. Near term, resilience is abating and prices may ease slightly. That said, the market does not appear especially vulnerable now, suggesting any decline will be moderate.

Credit spreads–US corporate BBB less 10y Treasury yields–are currently rated 0, down from 1 in the prior week, as anticipated, suggesting that spreads will narrow.

Consistent with the above, US high yield bonds are now rated 3, or highly resilient, up from 2 previously, again as expected. All else being equal, 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 Rating

For Week of…	7/25/2016	7/18/2016
DJ Industrial stocks	2 ^	2 ^
DJ Transportation stocks	1 ^	1 ^
European stocks (SPE)	1	0
Japanese stocks (TPX)	1 ^	0 ^

With a rating of 2, US stocks, as represented by the Dow Jones Industrial Average, display moderate resilience, suggesting that prices will tolerate negative news and events reasonably well in the near term. All else being equal, prices will tend to move higher.

European stock prices have a rating of 0, signaling that they are vulnerable. This suggests prices will likely fall with negative news and struggle to recover. Some elements of resilience are cyclical, however, and a key European stock resilience force is nearing a low in its cycle. Consequently, we may see a rating upgrade over the next month or so.

Japanese stocks also have a 0 rating and prices may fall in response to negative news. That said, they are closer to experiencing a shift to a higher rating than are European stocks.

In either case, prices may move higher on good news, such as additional accommodation by policymakers.  This may correspond to a rise in resilience (e.g., rating of 1).  However, news-driven price increases in the absence of higher resilience could prove temporary.   

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

Commodities

Market Resilience Index Rating

For Week of…	7/25/2016	7/18/2016
SPGSCI	2	2
Crude oil (WTI )	2	2
Gold	3	3
Copper	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 SPGSCI has a rating of 2, down from 3 previously over the last few weeks, reflecting the fact that oil prices appear vulnerable on a short-term basis. However, this looks to be a short-term breather to price increases rather than a fundamental shift in longer term resilience.

Gold and copper, meanwhile, continue to be resilient, with ratings of 3 for both. 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 Rating

For Week of…	7/25/2016	7/18/2016
EM stocks (MSCI MXEF)	3	3
EM bonds (FNMIX)	3	3

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.

In both cases, longer-term resilience forces are robust–and decidedly so. I expect this condition to remain in effect for several weeks. They will likely tolerate negative news and events fairly well.

Plausible Narrative

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

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, calming voices from the Federal Reserve’s Janet Yellen and her counterparts around the world. 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 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 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.

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.