The gauge on the left indicates whether the market is in a bull or bear phase, while the one on the right reflects the current valuation of the stock market. Stock market pricing indicates whether stocks are cheap or expensive in relation to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because market valuation is high, but advise caution when adding new positions.
Bull/Bear Market
The ASX Bull-Bear Market indicator remains at 66%, up from 56% two weeks ago. Three of four indicators from Australia and two for China indicate a risk-on stance, with a combined 60% weighting, while the US Bull/Bear indicator, which makes up the balance, is only 40% risk-on.
The ASX 200 Financials index (XFJ) crossed below its 50-week moving average, signaling a correction, but remains in a primary uptrend.
Stock Pricing
ASX stock pricing declined to 82.69 percent, compared to a high of 92.23 percent in August, and a low of 67.85 percent in April.
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 of 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
The ASX bull-bear indicator has improved to a mild bull market. Valuation is declining after reaching a new extreme, and the risk of a significant drawdown remains high.
Acknowledgments
- NAB: Monthly Business Survey
- ABS: Private Dwelling Approvals
- Trading Economics: China Business Indicators
- OECD: Composite Leading Indicators
- Morningstar: ASX 20 Statistics
- S&P Global Indices: All Ordinaries Statistics
- Market Index: ASX Statistics
- ABS: National Accounts
- ASX: Historical Market Statistics
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.