Posted on by Colin Twiggs

US Market Snapshot

Bull-Bear Market Index
Stock Market Pricing Indicator

The gauge on the left indicates whether the market is in a bull or bear phase, and the indicator 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 valuations are high; however, we recommend exercising caution when adding new positions.

Bull/Bear Market

We have revised the bull-bear market leading indicator to improve its responsiveness, stripping it down to a composite of five key indicators. At present, two of five indicators signal risk-off, indicating medium risk of a US bear market. Bull/Bear Market Indicator

Freight Transport Activity

The Cass Freight Shipments Index improved to 1.041, but the 12-month moving average remains in a downtrend, signaling risk-off. The index highlights broad freight shipping levels in the mainstream economy, and a rise or fall of more than 3 basis points signals risk-on or risk-off, respectively.

Cass Freight Shipments Index

Stock Pricing

US stock pricing declined to 95.72 from 96.08 percent last week, compared to its high of 96.66 five weeks ago and the recent low of 91.79 eleven weeks ago.

US Stock Market Value Indicator

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 the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.

Buffett Indicator

Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins. The ratio of stock market capitalization to GDP jumped to a new high of 3.25, up from 3.21 last week. The ratio is way above its long-term average of 1.2 and warns that stock pricing is dangerously high. Buffett Indicator: Stock Market Capitalization to GDP

Dow Jones Industrials Price-to-Sales

The Price-to-Sales ratio for the Dow Jones Industrial Average climbed to 4.21 from 4.16 last week. This indicates that stock valuations are stretched not only by wider profit margins but also by higher sales multiples that could only be justified by unusually strong revenue growth over the next decade. Dow Jones Industrials Price-to-Sales Ratio We use a 20% trimmed mean of the Price-to-Sales ratio across the 30 stocks in the Dow to remove the most extreme readings that would otherwise distort the ratio.

Shiller CAPE

Robert Shiller's CAPE smoothes out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings. The CAPE ratio retreated to 39.52 from 40.31 last week. The recent peak of 41.33 from four weeks ago is the second-highest in history, behind only the Dotcom bubble in 1999-2000, with values far above their long-term average of 22.4. Robert Shiller's S&P 500 CAPE Ratio

Conclusion

The Bull-Bear indicator suggests the US economy is slowing, but is not yet in a recession.

Extreme pricing, however, elevates the risk of a significant drawdown.

Acknowledgments

Managing Risk

To find out more, go to Managing Risk on the top menu, or see: