Flash Report: Market Uncertainty State Indicator (MUSI) signals Fragile Markets

Increasing turmoil in the Middle East has moved the Equity Risk Indicator to High. Implied volatilities for both the S&P 500 and Oil have crossed their thresholds. While the EuroStoxx and Emerging Market implied vols remain below theirs, it only takes the S&P and one other to trigger High Risk.

With Financial Leverage already High, The Financial Instability Regime Indicator has also shifted to Excess Leverage.

High Market Uncertainty and Financial Leverage lead to a Fragile state in markets, where downside risk is significantly higher than upside risk. While it's possible that a de-escalation of hostilities will calm things down, the possibility of further escalation justifies a defensive stance.

Model Portfolios (for Supporters) and the Factor Dashboard have been updated accordingly.

According to the Fractal Market Hypothesis, the Fragile state is when the investment horizon of investors shortens and becomes more uniform. As a result the market as a group tends to interpret information in much the same way. So with good news, everyone buys and with bad news, most sell. This herd mentality causes the high volatility characteristic of this state. Because of high Leverage, the risk is mostly on the downside.

Lets hope for the best, but prepare for continuing bad news.

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