The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market valuation levels. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high. Still, we would advise investors to be circumspect about adding new positions without carefully investigating the underlying value.
Bull/Bear Market
The Bull/Bear indicator remains at 40%, warning of a bear market ahead.
Updates to three market indicators (highlighted in orange) are delayed because of the US government shutdown.
The University of Michigan consumer survey reports the 3-month average of current economic conditions declined to a low 61.0 points, warning of a recession.
However, the S&P 500 remains elevated, and the Chicago Fed National Index of Financial Conditions was a low -0.546 on October 3, indicating a resilient economy with strong liquidity.
Stock Pricing
Stock pricing eased to 98.26 percent, compared to a high of 98.56 percent last week, and an April low of 95.04 percent. The extreme reading warns that stocks are at long-term risk of a significant drawdown.
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.
The S&P 500 rose to a new record of 3.33 times sales in September, compared to a long-term average of 1.8 times.
Conclusion
The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.
Acknowledgments
- Prof. Robert Shiller: CAPE 10 Data
- S&P Global: S&P 500 Sales and Earnings Estimates
- University of Michigan: Survey of Consumers
- Federal Reserve of St Louis: FRED Data
- Bureau for Economic Analysis: Motor Vehicles Data
Notes
- See Managing Risk to learn more.
- See Bull-Bear and Stock Valuation for more on our composite market indicators.
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.
Regards stick pricing – are the high-growth, mega-cap technology and consumer firms disproportionately pulling averages higher? Is the rest of the market priced closer to historical norms?
Thanks Graeme,
That’s a good question.
It appears that overpricing is disproportionately high in the technology sector, but still high across the board. We don’t have historic data for the S&P 500 equal-weighted index, but here is a comparison of current fundamentals for the S&P 500 to the Equal-Weighted index:
The Trailing P/E is marginally higher, but forward P/E, Price/Book, and Price/Sales are significantly higher for the headline index.
If we take Walmart (WMT) as a typical Main Street stock, current price-to-sales (1.18) is a lot higher than earlier years.
Berkshire Hathaway (BRK.B), another Main Street stock, is not as bad, but current price-to-sales (2.66) is close to the 2022 peak (2.72)
KNOW THIS: The tech stocks are a Ponzi scheme, playing fake transactions-
https://youtu.be/CBCujAQtdfQ?si=N_kjCa3Vo8PzXsUN