Author: Colin Twiggs

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.
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US Stocks Reach New Valuation Extreme

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market valuation levels. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead.

Bull-Bear Market Indicator

The unemployment rate and continued claims are gradually rising, indicating the US economy is slowing rather than the dramatic collapse suggested by recent BLS job growth revisions.

Continued Claims & the Unemployment Rate

Stock Pricing

Stock pricing increased to a new high of 98.19 percent, compared to the April low of 95.04 percent. The extreme reading warns that stocks are at long-term risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for 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 S&P 500 is at a precarious 25.4 times projected earnings, a level only exceeded during the Dotcom bubble in 2000.

S&P 500 Forward Price-Earnings Ratio

Conclusion

The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.

Acknowledgments

Notes

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Forward Orders Lift ASX to Mild Bull Signal

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the gauge on the right reflects stock market valuation. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

The ASX Bull-Bear Market indicator jumped to 66%, compared to 56% last week, with NAB forward orders crossing to a risk-on signal.

ASX Bull-Bear Market Indicator

Five of six indicators from Australia and China now indicate risk-on, while the ASX 200 relative to Gold (in AUD) remains risk-off. The index includes a 40% weighting for the US Bull/Bear indicator, which is unchanged.

NAB forward orders for Australia increased to 1.0 in August from 0 in the preceding two months, lifting the 3-month moving average above zero and signaling risk-on for the first time since October 2023.

Australia: NAB Forward Orders & 3-Month MA

Stock Pricing

ASX stock pricing increased to 91.37 percent, compared to a high of 92.23 percent four weeks ago and a low of 67.85 percent in April.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for 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 fell to 3.12%, a level typical of recessions like 1987 and 2020, when falling earnings force dividend cuts. Dividends are reasonably healthy at present, suggesting that valuations are extreme.

All Ordinaries Dividend Yield

Conclusion

The ASX bull-bear indicator has lifted to 66%, signaling a mild bull market. However, extreme valuations increase the long-term risk of a significant drawdown.

Acknowledgments

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Stay out of Tech Stocks | Julian Brigden

Maggie Lake interviews Julian Brigden, co-founder of MI2 Partners, about his fears for tech stocks, the AI bubble, US exceptionalism, the telegraphed rate cuts, and why people are ignoring hard asset outperformance.

[Length: 38:00]

Here is the XLK (S&P Technology SPDR) relative to XME (S&P Metals & Mining SPDR) that Julian refers to:

S&P Technology SPDR/S&P Metals & Mining SPDR

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Douglas Holtz-Eakin on Tariffs

Douglas Holtz-Eakin was Director of the Congressional Budget Office and Chief Economist of the Council of Economic Advisers under George Bush. His view on tariffs is that they are a tax paid by US corporations and consumers, and if you raise taxes, growth will suffer.

[Length: 6:30]

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Bond yields and the dollar fall as gold reaches a new high

Key Points

  • Long-term Treasury yields are falling steeply in anticipation of more Fed rate cuts as the economy slows.
  • The S&P 500 is retracing to test short-term support at 6500.
  • Financial market liquidity remains strong, supporting stocks.
  • The dollar is weakening, and gold and silver soared to new highs.

10-year Treasury yields fell to 4.046% testing the long-term band of support between 4.0% and 4.1%.

10-Year Treasury Yield

Expectations of steeper Fed rate cuts grow as more evidence emerges of a slowing economy. The Cass Freight Index is in a strong downtrend, and a fall below 1.0 would signal a recession. A useful barometer of economic activity, the index measures the number and cost of freight shipments across North America based on data from hundreds of large shippers.

Cass Freight Index

The current turmoil over tariffs — after the US Appeals court overruled Donald Trump’s “reciprocal” tariffs and his earlier “fentanyl” tariffs against China, Canada, and Mexico — will likely cause a sharp contraction in capital investment due to the uncertainty, almost guaranteeing a recession. Trump has lodged an appeal with the Supreme Court, but a decision is unlikely before next year. Unless he can get a stay on the lower court’s ruling, Treasury will be forced to fund the billions of dollars in tariffs collected.

While some believe that overturning the tariffs would cause a blowout in the fiscal deficit, we believe that the promise of a boost in revenue from tariffs was more spin than substance. There are no free lunches in economics; when something looks too good to be true, it usually is. Most of the cost of tariffs is currently borne by US corporations, but will likely be pushed onto consumers through price increases over the next year.

Goldman Sachs: Estimated Incidence of Tariff Costs

Where corporations do not pass on tariffs to customers, their profits and corporate tax paid to the Treasury will decline. Falling profits also hurt stock prices, reducing capital gains taxes. US consumers and corporations will directly or indirectly pay for the tariffs, and the impact on net Treasury receipts will likely be marginal.

Our biggest concern is not the loss of tax revenues, but the economic impact of policy uncertainty.

Stocks

The S&P 500 is retracing to test its latest support level at 6500, but rising Trend Index troughs indicate buying pressure, and respect of support will likely signal a further advance.

S&P 500

The equal-weighted S&P 500 ($IQX), more representative of large caps than the headline index, tests similar support at 7600. Rising Trend Index troughs again indicate buying support and likely continuation of the uptrend.

S&P 500 Equal-Weighted Index

Financial Markets

High-yield bond spreads are declining, indicating the return of loose financial conditions supporting high stock prices.

Junk Bond Spreads

Bitcoin (BTC) respected support at 110K, further indicating easing financial conditions — a bullish sign for stocks.

Bitcoin (BTC)

Dollar & Gold

The dollar is weakening in line with the outlook for interest rates. A US Dollar index breach of the long-term band of support between 96.5 and 97 would strengthen our long-term target of 90.

Dollar Index

Gold closed at a new high of $3,645 per ounce, while rising Trend Index troughs signal buying pressure. Expect a retracement to test support between $3,500 and $3,600, but respect will likely confirm an advance to $4,000 by the end of the year, as the dollar weakens.

Spot Gold

Silver is testing resistance at $41.50 per ounce. Again, we expect a retracement followed by a further advance, with a target of $44.

Spot Silver

Energy

Brent crude held steady at close to $66 per barrel after the OPEC+ meeting on the weekend decided on a smaller-than-expected initial increase in production of 137,000 barrels per day, in a phased unwinding of the 1.66 million barrels per day post-COVID production cut.

Brent Crude

Conclusion

Cyclical pressures are driving long-term yields lower, with a slowing economy likely to cause steeper-than-expected Fed rate cuts. Added uncertainty over tariffs increases the risk of a recession.

Loose financial conditions, boosted by falling Treasury yields, support stock prices, but a slowing economy would be bearish for earnings.

The dollar is weakening in response to the expected fall in interest rates, and a US Dollar Index breach of support between 96.5 and 97 would strengthen our long-term target of 90.

We expect gold and silver to rise as the dollar weakens, with respective targets of $4,000 and $44 per ounce by the end of the year.

 

Acknowledgments

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Weak jobs and falling crude = September rate cut

Key Points

  • The Fed will likely cut interest rates in September after a weak jobs report.
  • Falling crude oil prices also ease inflationary pressure.
  • Long-term Treasury yields fall, anticipating a rate cut.
  • The dollar weakened as yields softened, while gold soared to a new high of $3,600 per ounce.

The August labor report disappointed with a low 22,000 job growth compared to an expected 75,000. Another June data revision saw jobs contract by 13,000, after initial reported gains of 147,000 were revised down to 14,000 last month.

Employment Growth

Growth in total weekly hours worked came to a complete halt in August, with annual growth falling to 0.7%. Real GDP growth will likely follow.

Total Hours Worked

The uptrend in continued claims confirms the August rise in the unemployment rate to 4.3%.

Unemployment

The unemployment level ( 7.4m ) now exceeds job openings ( 7.2m ), but only by 200K.

Job Openings

Temporary jobs fell to 2.5 million, a level typically seen during recessions.

Temporary Employment

Layoffs and discharges are in an uptrend.

Layoffs & Discharges Rate

The 2.0% quit rate indicates that employees are no longer confident in finding new jobs.

Quit Rate

Average hourly earnings growth slowed to an annualized rate of 3.3% in August, but year/year growth was steady at 3.9%, still indicating a balanced labor market.

Average Hourly Earnings

Crude Oil

OPEC+ has injected a lot of downside pricing risk into the oil markets this week, fueling speculation that the second wave of voluntary cuts totaling 1.65 million b/d could be unwound much quicker than previously expected. According to news reports, Saudi Arabia is interested in pushing ahead with the unwinding during the September 7 meeting, citing the need to regain market share. (OilPrice.com)

The move has the potential to create a massive oversupply. Brent crude fell to $65.50 per barrel on Friday, but if the Saudis succeed, expect a test of support at $60. Falling crude prices would squeeze shale producer margins, causing a drop in US production.

Brent Crude

Lower energy prices would ease inflationary pressures in the US, allowing more room for Fed rate cuts.

ISM Services

The ISM services PMI improved to 52% in August, indicating expansion.

ISM Services PMI

New orders jumped to 56%, signaling an improving outlook.

ISM Services New Orders

However, services employment signals contraction, confirming the weak labor report.

ISM Services Employment

A steep 69.2% for the prices sub-index also warns of strong inflationary pressures.

ISM Services Prices

Contracting employment and rising prices in the large services sector warn of stagflation. We expect the Fed to cut in September, but then pause to see how this affects prices.

Stocks

A weak labor report is a bearish sign for stocks despite the prospect of a Fed rate cut. A reversal of the S&P 500 below support at 6400 would warn of a correction.

S&P 500

We expect the Dow Jones Industrial Average to test support at 45,000. Respect of support would confirm another advance. A breach is less likely, but would signal a test of 44,000.

Dow Jones Industrial Average

Financial Markets

The Chicago Fed Index retreated to -0.526, warning that financial conditions are tightening.

Chicago Fed National Financial Conditions Index

Tighter financial conditions are also highlighted by a decline in bank reserves to below $3.2 trillion.

Commercial Bank Reserves at the Fed

Bitcoin is testing support at 110K. A breach would warn of a swing to risk-off in financial markets, which would be bearish for stocks.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields plunged to 4.09%, heading for a test of long-term support at 4.0% as speculators pile into bonds ahead of the expected September rate cut. However, we have warned of the risk that long-term yields rise in response to a Fed cut — as in September last year.

10-Year Treasury Yield

Dollar & Gold

The dollar weakened in response to the poor jobs report, anticipating falling interest rates.

Dollar Index

Gold surged to a new high at $3,600 per ounce before closing at $3,587. Expect another test of support at $3,500, but respect will likely confirm another advance — and our year-end target of $4,000.

Spot Gold

Silver is retracing to test support at $40, but respect will likely confirm another advance and a target of $44.

Spot Silver

Conclusion

Weak jobs growth in August warns that economic growth is slowing, but the ISM services report warns of strong price pressures in the services sector. We expect a Fed rate cut in September but then a pause as the Fed remains wary of stagflation, with low growth and rising prices.

We expect the dollar to weaken in response to rate cuts, with gold and silver soaring to new highs.

The Fed should take care to avoid a repeat of last September, when Fed rate cuts sparked a sell-off in long-term Treasuries, signaling the bond market’s displeasure with monetary and fiscal policy. We believe they will aim for a gradual decline, with a pause after the September cut to assess the impact of tariffs and a slowing economy on prices.

A Saudi move to increase crude oil production would likely drive Brent crude to $60 per barrel or below, giving the Fed more room to cut rates.

Acknowledgments

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US Leading Indicators

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market valuation levels.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead.

Bull-Bear Market Indicator

Employment in cyclical sectors — Manufacturing, Construction, Transportation, and Warehousing — eased to 27.76 million from a high of 27.82 million in February, but is far above the 300K fall that would warn of a recession.

Employment in Cyclical Sectors

The 12-month average of heavy truck sales fell to 38.0K units in August, reflecting slower activity in the broad economy. A fall of more than 10% signals risk-off.

Heavy Truck Sales

Stock Pricing

Stock pricing increased slightly to 97.97, close to the high of 97.98 percent from two weeks ago, and well above the April low of 95.04 percent. The extreme reading warns that stocks are at long-term risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for 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.

Robert Shiller’s CAPE compares the S&P 500 index to the preceding 10 years of inflation-adjusted earnings. Except for the Dotcom bubble in 2000, the current CAPE value of 38.36 is higher than at any time in the past 120 years.

S&P 500 CAPE

Conclusion

The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.

Acknowledgments

Notes

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ASX Leading Indicators

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the one on the right reflects stock market valuation.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 56%, down from 64% five weeks ago.

ASX Bull-Bear Market Indicator

Four of six indicators from Australia and China indicate risk-on, while the remaining two — NAB Forward Orders and the ASX 200 relative to Gold (in AUD) — are risk-off. The index includes a 40% weighting for the US Bull/Bear indicator.

Australian private dwelling approvals dipped sharply in July, but the 3-month moving average (at 15.7) remains above the long-term moving average, signaling risk-on.

Australia: Private Dwelling Approvals

The OECD Composite Leading Index for China continues to reflect weakness, with an August reading of 99.65, but remains above the risk-off threshold of 99.0 (red line).

OECD Composite Leading Index for China

Stock Pricing

ASX stock pricing eased slightly to 90.90, compared to a high of 92.23 percent three weeks ago and a low of 67.85 in April.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for 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 PE climbed to 18.4 times highest trailing earnings, compared to highs of 21.0 in August 1987 and 20.3 in December 1999.

All Ordinaries PE of Highest Trailing Earnings

Conclusion

The ASX bull-bear indicator warns of a bear market, and extreme valuations raise the long-term risk of a significant drawdown.

Acknowledgments

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Gold breaks to a new high

Key Points

  • Gold broke through resistance at $3,500 per ounce, reaching a new high of $3,546.
  • Silver is testing resistance at $41 per ounce.
  • Sovereign debt is losing favor, with the UK 30-year gilt yield above 5.7% for the first time in 27 years.

After its recent breakout, the Dow Jones Industrial Average has retraced to test support at 45K. Respect is likely, but a breach would raise questions about the validity of the Dow’s recent bull market signal.

Dow Jones Industrial Average

September is also the worst month of the year for stock performance, most likely due to investment managers cleaning up their portfolios before the financial year-end.

Stock Market Performance by Calendar Month

While September has the worst average return, we are also wary of October, which has delivered some of the most severe crashes in memory, including October 1929 and 1987.

Financial Markets

Bitcoin is testing support at 110K, warning that investors’ risk appetite is shrinking. A follow-through below the recent low would be a strong bear signal for stocks.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields are consolidating in a narrow band above support at 4.2%, anticipating a Fed rate cut in September, causing a decline in long-term yields.

10-Year Treasury Yield

However, long-term yields are in a secular uptrend, with the US 30-year testing resistance at 5.0%.

30-Year US Treasury Yield

Global investors are increasingly shunning long-term sovereign debt. The UK 30-year Gilt rose above 5.70% for the first time since April 1998.

30-Year UK Gilt Yield

Japan’s 30-year JGB yields are climbing steeply due to the Bank of Japan tightening monetary policy.

30-Year JGB Yield

The 30-year German Bund is on a similar path.

30-Year German Bund Yield

A secular bear market in bonds will also likely be bearish for stocks.

Dollar & Gold

The US Dollar Index continues in a bearish narrow consolidation above support at 97. Trend Index peaks below zero warn of long-term selling pressure, and a breach of support at 97 would strengthen our long-term target of 90.

Dollar Index

Gold broke through resistance at $3,500 per ounce, reaching a new high of $3,546. A higher Trend Index trough signals buying pressure. Expect retracement to test the band of support between $3,400 and $3,500, but respect will likely confirm another advance, further strengthening our target of $4,000 by the end of the year.

Spot Gold

Silver made a similar breakout above $40 per ounce. Again, we expect retracement to test the new band of support between $39 and $40, but respect will likely confirm another advance. Our year-end target is $44.

Spot Silver

ISM Manufacturing

The manufacturing sector continues to signal a contraction, but the rate of decline slowed, with the ISM Manufacturing PMI rising to 48.7%.

ISM Manufacturing PMI

The outlook improved, with forward orders rising to 51.4%.

ISM Manufacturing New Orders

However, employment prospects remain low, with the employment sub-index at 43.8%.

ISM Manufacturing Employment

Input prices are still rising, but the prices sub-index surprisingly improved to 63.7%. A similar improvement in Services next week would indicate that inflationary pressures are easing, increasing the likelihood of a Fed rate cut.

ISM Manufacturing Prices

Conclusion

Long-term government bonds are in a secular bear market, which will likely be bearish for stocks.

Gold reached a new high above resistance at $3,500 per ounce, reflecting investor caution towards sovereign debt. A retracement that respects the latest support level would confirm our year-end target of $4,000.

Acknowledgments

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US Leading Indicators

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market drawdown risk.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead.

Bull-Bear Market Indicator

The Chicago Fed National Financial Conditions Index declined to -0.56, indicating easy monetary conditions that support stocks and bonds.

Chicago Fed National Financial Conditions Index

However, heavy truck sales are declining, with the 12-month average falling to 38.5K units, reflecting slowing transport activity in the broader economy.

Heavy Truck Sales

Stock Pricing

Stock pricing eased slightly to 97.96 from a new high of 97.98 percent last week, and a low of 95.04 percent in April. The extreme reading warns that stocks are at long-term risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for 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.

Conclusion

The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.

Acknowledgments

Notes

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