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 market valuations are high, but we advise caution when adding new positions.
Bull/Bear Market
The ASX Bull-Bear Market indicator remains at 66%, up from 56% eight 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 accounts for the other 40%, remains bearish.
The ASX 200 Financials Index (XFJ) crossed below its 50-week moving average to test support at 9000. A breach of support would indicate reversal to a primary downtrend, signaling risk-off.
Australian private dwelling approvals jumped in November, with the 3-month moving average climbing to 16.7K. Values above the 20-year MA signal risk-on.
Stock Pricing
ASX stock pricing increased to 80.82 percent from 80.57 percent last week, roughly midway between 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 stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.
The All Ordinaries Price-Earnings ratio of 18.0, based on highest trailing earnings, is at the 93rd percentile and close to the extremes above 20.0 in 1987 and 2000.
Conclusion
The ASX bull-bear indicator indicates a mild bull market, with most leading indicators above the risk-off threshold. Stock market pricing has softened but remains extreme and does not constitute a buy signal.
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.