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 56%, from 66% three weeks ago. One of four Australian indicators and one of two Chinese indicators signal risk-off. When combined with the US Bull/Bear indicator, which has a 40% weighting, the composite indicator signals a mild bear market.
The ASX 200 Financials Index respected support at 9000 and remains in a primary uptrend, indicating risk-on.
The OECD China Leading Composite Index declined to 98.8, the second month below the risk-off threshold of 99.0.
Stock Pricing
ASX stock pricing increased to 84.90 percent from 82.80 percent last week, compared to 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 ratio of ASX Stock Market Capitalisation to GDP increased to 1.19, which is 15.5% above the long-term average of 1.03.
Conclusion
The ASX bull-bear indicator at 56% indicates a mild bear market, with signs that the Chinese economy is slowing. Stock market pricing remains extreme, indicating an elevated risk of a drawdown.
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.