The dial on the left indicates bull or bear market status, while the one on the right reflects stock market drawdown risk.
Bull/Bear Market
The Bull/Bear Market indicator improved to 60% from 40% three weeks ago after a significant revision to November heavy truck sales data.
Two of the five indicators signal Risk-off:
The Fed has cut interest rates three times since August, which usually flags a bear market.
However, financial market conditions remain ultra-easy, and the coincident economic index, while close to the 2.5% threshold, is still above water. Heavy truck sales remain robust, while employment in cyclical sectors is near record highs.
Stock Pricing
Stock pricing increased to the 97.99 percentile from 97.91 last Friday. The extreme reading warns that stocks are at risk of a significant drawdown.
The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.
Conclusion
We are at the cusp of a bear market, with the bull-bear indicator declining to 60%. Stock pricing is also extreme, warning of the potential for large drawdowns.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.