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 ASX Bull-Bear Market indicator remains at 64%, with two of five leading indicators signaling Risk-off, while the US leading index remains at 60%:
This was covered in more detail last week.
Stock Pricing
This is our first publication of the ASX stock pricing indicator, currently at the 88.31 percentile. The high 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.
Value Indicators
The Warren Buffett indicator compares stock market capitalization to GDP. By comparing market value to total output, it eliminates fluctuations due to profit margins, providing a more stable long-term ratio. The 86.13% percentile indicates the ratio is high compared to its long-term mean of 1.02.
We only have limited data for the ASX 20 forward PE, but this still provides a useful measure of current value. We use a 20% trimmed mean to remove the most extreme readings in the index, which tend to distort the average.
A similar measure is used on the price-to-sales ratio for the ASX 20. The 20% trimmed mean of 4.49 is close to its 2021 high.
The price-earnings ratio is based on the latest trailing earnings (blue below), which can generate extreme readings when earnings fall sharply, as in 2020. We use a second pe-ratio based on highest trailing earnings to eliminate the extremes. However, the large resources sector, with higher-than-normal earnings volatility, necessitates using both ratios to provide a more balanced view.
The current dividend yield of 3.77% is below the long-term mean of 4.11%. We use a reverse z-score for the ASX dividend yield, as lower yields indicate higher valuations (similar to high PE ratios).
Conclusion
We are borderline in a bull market, with the bull-bear indicator at 64%.
Stock pricing remains high, increasing the risk of a significant drawdown.
Acknowledgments
- NAB Monthly Business Survey: January 2025
- ABS: Private Dwelling Approvals
- Trading Economics: China Business Indicators
- Morningstar: ASX All Ords & ASX 20 Statistics
- Market Index: ASX Statistics
- ABS: National Accounts
- ASX: Historical Market Statistics