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 rebounded to 60%, due to data revisions to heavy truck sales. Two of the five leading indicators now signal Risk-off:
Heavy truck sales were revised up to a seasonally adjusted 37,823 units in December, after an earlier report at 35,152 units. January sales jumped to a hot 44,499 units confirming that economic activity is not slowing.
This is the second time that a heavy trucks data revision has affected our model. We will investigate using a 3-month moving average to reduce the impact of revisions.
Stock Pricing
Stock pricing eased slightly to 97.75 from the 97.91 percentile two weeks ago. The extreme reading continues to warn 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 close to a bear market, with the bull-bear indicator revised to 60%. Stock pricing remains extreme, increasing the risk of a significant drawdown, warning not to increase exposure to risk assets like growth stocks.
Acknowledgments
- Multpl.com: Shiller PE Ratio
- S&P Global: S&P 500 Sales and Earnings Estimates
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
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.