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 Leading Index remains at 64, indicating a slowing bull market. One of four Australian indicators and one of two Chinese indicators signal risk-off. However, NAB Forward Orders and the ASX 200 Financials Index are falling sharply, so we are on bear watch. The improvement in recent weeks was due to changes to composite indicators for the US Leading Index, which enjoys a 40% weighting in the ASX Index.
Financial Sector
The ASX 200 Financials Index (XFJ) remains below its 50-week weighted moving average, but respected primary support at 9000. A breach of 9000 would indicate a primary downtrend, signaling risk-off, but the signal remains risk-on for the present.
Financial sector performance reflects confidence in the broader economy, particularly in the housing sector.
Stock Pricing
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.
Conclusion
The Bull-Bear indicator suggests that the Australian economy is slowing. Two indicators have fallen sharply, and, while not yet signaling risk-off, we are on bear alert.
On the other hand, valuations remain high, increasing the 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
Managing Risk
To find out more, go to Managing Risk on the top menu, or see:
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.