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 when the 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% four weeks ago. Three of four indicators from Australia and two from China indicate a risk-on stance, with a combined 60% weighting, while the US Bull/Bear indicator, which makes up the balance, is at 40% risk-on.
Australian building approvals for private dwellings remain above their long-term moving average, with the 3-month moving average at 15,600 in October.
China’s NBS Manufacturing PMI increased to 49.2 in November, also above the 49.0 threshold for a risk-off warning.
Stock Pricing
ASX stock pricing declined to 80.24 percent, compared with the August high of 92.23 percent and the April low of 67.85 percent.
We use z-scores to measure each indicator’s current position relative to its historical data, with results 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.
The All Ordinaries dividend yield is at a low 3.18%, just above the 3.0% level typical of an overpriced market.
Conclusion
The ASX bull-bear indicator remains in a mild bull market, with China’s NBS Manufacturing PMI holding above its signal line. Valuation is declining after reaching a new extreme, but 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.