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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ASX Weekly Market Snapshot

Bull-Bear Market Indicator
Stock Market Pricing Indicator

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

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 64%, with two of five leading indicators signaling Risk-off, while the US leading index remains at 60%:

Bull-Bear Market Indicator

This was covered in more detail last week.

Stock Pricing

This is our first publication of the ASX stock pricing indicator, currently at the 88.31 percentile. The high reading warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. 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.

Value Indicators

The Warren Buffett indicator compares stock market capitalization to GDP. By comparing market value to total output, it eliminates fluctuations due to profit margins, providing a more stable long-term ratio. The 86.13% percentile indicates the ratio is high compared to its long-term mean of 1.02.

ASX Market Capitalization/GDP

We only have limited data for the ASX 20 forward PE, but this still provides a useful measure of current value. We use a 20% trimmed mean to remove the most extreme readings in the index, which tend to distort the average.

ASX 20 Forward PE with 20% Trimmed Mean

A similar measure is used on the price-to-sales ratio for the ASX 20. The 20% trimmed mean of 4.49 is close to its 2021 high.

ASX 20 Price to Sales with 20% Trimmed Mean

The price-earnings ratio is based on the latest trailing earnings (blue below), which can generate extreme readings when earnings fall sharply, as in 2020. We use a second pe-ratio based on highest trailing earnings to eliminate the extremes. However, the large resources sector, with higher-than-normal earnings volatility, necessitates using both ratios to provide a more balanced view.

ASX Price Earnings Ratio of Highest Trailing Earnings

The current dividend yield of 3.77% is below the long-term mean of 4.11%. We use a reverse z-score for the ASX dividend yield, as lower yields indicate higher valuations (similar to high PE ratios).

ASX Dividend Yield

Conclusion

We are borderline in a bull market, with the bull-bear indicator at 64%.

Stock pricing remains high, increasing the risk of a significant drawdown.

Acknowledgments

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Strong uptrends in stocks and gold

A longer-term view, with weekly charts, shows stocks and gold in a healthy bull market. The energy sector is bearish, indicating low short- to medium-term inflation, as are industrial metals.

Stocks

The S&P 500 closed above 6100, signaling a fresh advance. Expect retracement to test the new support level, but respect will likely confirm a target of 6400.

S&P 500

Mega-cap technology stocks are the primary driver, with large caps lagging. Lower Trend Index peaks on the S&P 500 equal-weighted index ($IQX) warn of selling pressure, and another test of primary support at 7000 is likely.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin consolidates above 90K, indicating stable liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

The 10-year Treasury yield signals another test of support at 4.4%. Respect is more likely, and another test of 4.8% would be bearish for stocks.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index has weakened in the last two weeks as the Trump administration threatens to disrupt the global trading system with increased tariffs. Respect of support at 106 remains likely, but a breach would offer a target of 102.

Dollar Index

Gold is in a strong uptrend. The current retracement will likely respect support at $2,800 per ounce, confirming our target of $3,000.

Spot Gold

Energy

Crude is in a bear market, with Nymex WTI crude respecting resistance at $80 per barrel. We expect crude to remain range-bound for most of the year.

Nymex WTI Crude

We are long-term bulls on uranium, but there are no buy opportunities. The Sprott Physical Uranium Trust (SRUUF) confirmed the bear market, breaking support at 16 to signal another decline.

Sprott Physical Uranium Trust (SRUUF)

Copper

Copper rallied strongly over the last two weeks, testing resistance near 10K. However, the move is not driven by an increase in end-user demand. From Mining.com:

Worries that US President Donald Trump may impose tariffs on copper had spurred traders and investors to buy copper on the US COMEX exchange and sell on the LME.

Short or bearish positions on the LME are being cut or rolled over ahead of settlement on Wednesday, turning discounts for nearby copper contracts against those further along the maturity into premiums or backwardations.

Copper

Iron & Steel

Iron ore continues its gradual downtrend.

Iron Ore

Australia

The ASX 200 recovered above resistance at 8500, confirming a medium-term target of 8900.

ASX 200 Index

Conclusion

US and Australian stocks are in an uptrend, supported by strong liquidity in financial markets. However, the Trump administration’s trade policies have unsettled markets, making them susceptible to higher-than-normal volatility.

Bonds are in a bear market, and the 10-year Treasury yield is expected to resume its uptrend.

Gold continues in a strong uptrend, with demand driven by geopolitical changes. Respect of support at $2,800 per ounce would confirm our short-term target of $3,000.

Industrial metals remain in a bear market due to weak demand from China.

 

 

 

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Big Picture reading: Ukraine

Here is some interesting analysis on Donald Trump and his “peace plan” for Ukraine:

Phillips O’Brien, professor of strategic studies at University of St Andrews, Scotland: What Europe Can do in a Worst-Case Scenario

Nataliya Gumenyuk, Ukrainian journalist and co-founder of The Reckoning Project: Putin’s Ukraine – The End of War and the Price of Russian Occupation

Timothy Snyder, American historian and expert on European history: Crossing a line

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Gold headed for $3,000

Gold broke short-term resistance at $2,900 per ounce, signaling a test of our $3,000 target. The precious metal advanced to $2,934 on the announcement of US tariffs on steel and aluminum. Uncertainty over the geopolitical outlook has increased volatility in global financial markets and demand for gold as a haven. Breakout above $3,000 would offer a medium-term target of $3,600.

Spot Gold

From the WSJ:

President Trump announced 25% tariffs on imports of steel and aluminum to the U.S., reinstating global duties without exceptions for allies such as Canada, Mexico, Japan and South Korea that were relaxed by the Biden administration.

Central bank purchases of bullion increased to 333 tonnes in Q4 of last year, according to the World Gold Council, with uncertainty over the US presidential election boosting demand.

Gold Purchases by Central Banks

Silver also caught a bid, testing resistance at $32 per ounce, but lags gold.

Spot Silver

Conclusion

Gold is headed for a test of $3,000 per ounce for the first time. Expect retracement to test new support at $2,900, but respect will likely confirm the advance to $3,000.

Breakout above $3,000 would offer a medium-term target of $3,600.

Uncertainty over US federal debt, long-term inflation, and geopolitical tensions drive demand.

Acknowledgments

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Inflation spooks Treasuries and stocks

Rising inflation expectations and robust economic data mean the Fed will likely pause rate cuts for several months. Stocks reacted negatively, but gold seemed unfazed.

The US economy shows slow but steady growth, with total weekly hours worked growing at an annual rate of 1.0% compared to real GDP at 2.5% in 2024.

Real GDP & Total Hours Worked

Heavy truck sales, a reliable leading indicator, fell sharply in December but rebounded to a robust 44.5K in January.

Heavy Truck Sales

Another reliable leading indicator is employment in cyclical sectors, which also shows robust growth. In a recession, manufacturing, construction, and transportation & warehousing typically shed far more jobs than the rest of the economy.Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

ISM Survey

ISM business surveys show continued expansion in the services sector in January.

ISM Services PMI

It was joined by a manufacturing recovery above 50% after 26 months of contraction.

ISM Manufacturing PMI

Labor Market

The labor market added a modest 143K jobs in January.

Employment Growth

However, the unemployment rate fell to 4.0% from 4.2% in November, possibly aided by a surge in deportations.

Unemployment

Average weekly hours worked fell to 34.1 for the first time since the 2020 pandemic. This typically serves as an early warning of increased layoffs. Employers first cut back hours before shedding staff.

Average Weekly Hours

Lower weekly hours is contradicted by the JOLTS report, which showed job openings exceeding unemployment in December.

Job Openings

Average Hourly Earnings

A sharp increase in average hourly earnings, showing 4.1% growth for the 12 months to January, will likely cause concern at the Fed.

Average Hourly Earnings

December earnings growth surprised, at close to 0.5% for the month or 5.7% annualized.

Average Hourly Earnings - Monthly

University of Michigan Survey

Consumer sentiment dipped slightly in February, with the 3-month moving average declining to 71. Sentiment remains below levels during the 2020 pandemic.

University of Michigan: Consumer Sentiment

The current economic conditions index declined to 68.7 in February, but the 3-month MA is still rising.

University of Michigan: Current Economic Conditions

Expectations are also falling, with the 3-month MA declining to 70.

University of Michigan: Consumer Expectations

Financial markets were spooked by the sharp jump in expected price increases in the next 12 months, which reached 4.3% in February, with the 3-month MA at 3.5%.

University of Michigan: 1-Year Inflation Expectations

Five-year inflation expectations are also rising, with the 3-month MA climbing to 3.2% in February.

University of Michigan: 5-Year Inflation Expectations

Treasury Market

Ten-year Treasury yields rallied in response to the stronger inflation outlook, testing resistance at 4.5%. Recovery above the descending trendline would warn of another advance.

10-Year Treasury Yield

Stocks

The S&P 500 fell sharply in response to the prospect of higher interest rates. Breach of 5850 would signal a test of primary support at 5800.

S&P 500

Dollar & Gold

The Dollar rallied, testing resistance at 108 in response to higher interest rates. Breakout would offer a short-term target of 110.

Dollar Index

Gold is retracing to test support at $2,850 per ounce. Respect would signal a test of $3,000.

Spot Gold

Silver broke its new support level at $32 per ounce, warning of retracement to test $30.

Spot Silver

Conclusion

Strong growth in average hourly earnings and rising consumer inflation expectations will likely cause the Fed to pause rate cuts until the current uptrend reverses. That could take more than six months.

10-year Treasury yields are expected to resume their uptrend. Recovery above 4.5% would confirm.

Rising long-term yields are bearish for stocks, with the S&P 500 likely to test primary support at 5800.

The Dollar Index is also expected to resume its uptrend. Breakout above 108 would signal another test of resistance at 110.

Gold is expected to continue its uptrend, with a breakout above $2,900 per ounce signaling a test of $3,000 for the first time. Rising inflation expectations and increased bullion holdings by foreign central banks will likely maintain a shortage of physical gold.

Acknowledgments

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US Weekly Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

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

Bull/Bear Market

The Bull/Bear Market indicator rebounded to 60%, due to data revisions to heavy truck sales. Two of the five leading indicators now signal Risk-off:

Bull-Bear Market Indicator

Heavy truck sales were revised up to a seasonally adjusted 37,823 units in December, after an earlier report at 35,152 units. January sales jumped to a hot 44,499 units confirming that economic activity is not slowing.

Heavy Truck Sales (units)

This is the second time that a heavy trucks data revision has affected our model. We will investigate using a 3-month moving average to reduce the impact of revisions.

Stock Pricing

Stock pricing eased slightly to 97.75 from the 97.91 percentile two weeks ago. The extreme reading continues to warn that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. 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

We are close to a bear market, with the bull-bear indicator revised to 60%. Stock pricing remains extreme, increasing the risk of a significant drawdown, warning not to increase exposure to risk assets like growth stocks.

Acknowledgments

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Gold riding high as the Dollar weakens

A weakening Dollar has further boosted gold, lifting it above resistance at $2,800 per ounce. Treasury yields are also falling as anticipated inflation declines. However, volatility remains high, and we need to stay focused on the long-term trend.

Treasury Markets

Ten-year Treasury yields broke support at 4.5% with declining Trend index peaks indicating selling pressure. We expect a correction with a target of 4.2%.

10-Year Treasury Yield

The Dollar

The Dollar Index surprised, retreating below 108. Another test of support at 107 is likely, with declining Trend Index peaks indicating selling pressure.

Dollar Index

Gold and Silver

Gold soared to an intra-day high of $2,880 per ounce, with rising Trend Index troughs signaling strong buying pressure. The breakout offers a short-term target of $3,000. A retracement that respects new support at $2,800 would strengthen the signal.

Spot Gold

Silver broke resistance at $32 per ounce before retracing to test the new support level. Respect would confirm a target of $35.

Spot Silver

Conclusion

Donald Trump’s threat and quick reversal of tariffs on Canada and Mexico precipitated Dollar weakness in the past few sessions.

A deliberate strategy to weaken the Dollar would likely yield better results for the US than tariffs. Tariffs risk retaliation from trading partners and undermine domestic industry’s long-term competitiveness in export markets.

A public policy to weaken the Dollar would likely face bitter opposition from Wall Street, which has long profited from the Dollar as a global reserve currency. Behaving like a bull in a China shop, however, may achieve the same ends for Trump, while he can deny that it was ever his intention.

However, we should not trade hunches and need to base our strategy on what we can clearly see. The dollar index’s long-term trend remains upward.

Dollar Index

The Treasury market shows surprising strength, with the 10-year yield breaking support at 4.5%. Bond market reaction to Fed rate cuts last year drove long-term yields higher, but upward pressure has eased now that the Fed has paused. Fears of a rebound in inflation are fading, lowering the term premium.

The long-term view, however, shows a continued uptrend.

10-Year Treasury Yield

Lower Treasury yields and a weak Dollar are both bullish for gold, which has broken resistance at $2,800 per ounce and is likely to test $3,000 in the next few weeks.

Silver lags gold because of far larger industrial demand, which is not expected to expand at the same rate.

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Japanese inflation bullish for US stocks

Japanese inflation climbed to 3.6% for the 12 months to December 2024, a sharp increase from 2.9% in November.

Japanese Inflation Rate - Annual

Wages growth is even hotter, according to Jim Grant:

Wage growth is on the march in Japan, as nominal cash earnings jumped 4.8% in December from the prior year period, blowing past the 3.7% consensus to mark the hottest single reading since 1997. That striking data point further stokes an inflationary impulse which left nationwide CPI at a meaty 3.6% year-over-year clip in December.

Accordingly, a reluctant Bank of Japan has been forced into action, hiking overnight interest rates by one quarter percentage point to 0.5% late last month, its most restrictive rate stance since early 2008. However, EZ-money-minded Kazuhiro Masaki, director-general of the BoJ’s monetary affairs department, stuck to his rhetorical guns in an address to parliament this morning, declaring that “we must support economic activity with loose monetary policy.”

Not so fast, Goldman Sachs believes. Further tightening is in the offing as soon as July per predictions from senior Japan economist Tomohiro Ota, with benchmark borrowing costs poised to reach 1.5%, a level unseen for 30 years.

The Yen strengthened in recent weeks, with lower Trend Index peaks indicating buying pressure (selling pressure for the USD cross). Breach of support at 150 would signal another test of 140.

Japanese Yen

A stronger Yen is typically bullish for bonds, with the 10-year Treasury yield (gray) declining in synch with the Yen/Dollar exchange rate (blue).

10-Year Treasury Yield & Japanese Yen

A strong Yen is also typically bullish for stocks, with the S&P 500 (navy) rising when the Yen/Dollar exchange rate (blue) declines.

S&P 500 & Japanese Yen

Conclusion

The Bank of Japan is expected to hike the overnight rate by 100 basis points in 2025, to a level not seen in 30 years. Rate hikes are likely to significantly strengthen the Yen against the Dollar, with a medium-term target of 140.

A sharp fall in the exchange rate increases financial market volatility in the US as carry trades unwind. However, a strong Yen typically coincides with falling long-term US Treasury yields, which would be bullish for stocks.

Acknowledgments

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Threat of a US-China trade war boosts gold

Donald Trump’s reversal on tariffs on Canadian and Mexican imports caused a sharp rebound in the S&P 500. However, tariffs on Chinese imports remain in place and have elicited a response from the Middle Kingdom.

Stocks

The S&P 500 retraced to test resistance at 6000. Respect would confirm a correction.

S&P 500

Six of seven mega-cap technology stocks showed losses, with only Meta Platforms (META) recording an up-day.

Top 7 Technology Stocks

Financial Markets

Financial market conditions remain stimulative, with Moody’s Baa corporate bond spread narrowing to 1.45%, the lowest level since 1997. This indicates the ready availability of credit.

Moody's Baa Corporate Bond Spreads

Treasury Markets

Ten-year Treasury yields continue to test support at 4.5%. Respect will likely confirm an advance to test resistance at 5.0%.

10-Year Treasury Yield

US Economy

ISM Manufacturing PMI improved to 50.9%, the highest level in 27 months, indicating a recovery in the sector.

ISM Manufacturing PMI

New orders jumped to 55.1%, indicating expansion.

ISM Manufacturing New Orders

However, the Prices sub-index also increased, indicating inflationary pressures.

ISM Manufacturing Prices

Leading industry sectors also warn of a slowing economy. Airfreight and logistics (blue) plunged by more than 10% and would flag a recession ahead if joined by a decline in either containers and packaging (orange) or road and rail (green).

Leading Industry Sectors

China Tariffs

China has slapped tariffs on US imports in a swift response to Donald Trump’s duties on Chinese goods, renewing a trade war between the world’s top two economies as America’s President seeks to punish Beijing for not halting the flow of illicit drugs.

Mr Trump’s additional 10% tariff across all Chinese imports into the US came into effect at 12.01am Eastern Time on Tuesday (5.01am GMT).

Within minutes, China’s Finance Ministry said it would impose levies of 15% for US coal and Liquid Natural Gas and 10% for crude oil, farm equipment and some cars and trucks. The new tariffs on US exports will start on February 10, the ministry said.

China also said it was starting an anti-monopoly investigation in Alphabet Inc’s Google, while including both PVH Corp, the holding company for brands including Calvin Klein, and US biotechnology company Illumina on its “unreliable entities list”.

Separately, China’s Commerce Ministry and its Customs Administration said it is imposing export controls on tungsten, tellurium, ruthenium, molybdenum and ruthenium-related items to “safeguard national security interests”. China controls much of the world’s supply of such rare earths that are critical for the clean energy transition. (Evening Standard)

Dollar & Gold

The Dollar Index retreated from resistance at 110, but respect of support at 108 will likely confirm another test of 110. The threat of increased tariffs is expected to strengthen the Dollar and increase upward pressure on long-term interest rates as foreign central banks sell reserves to support their currencies.

Dollar Index

Gold broke resistance to set a new high at $2,816 per ounce. Expect retracement to test the new support level at $2,800, but respect will likely confirm our target of $3,000.

Spot Gold

Conclusion

Canada and Mexico are a sideshow, with China likely to be the primary target of US sanctions imposed by the Trump administration. China’s swift retaliation is expected to lead to escalation.

China is in a far weaker position because of its large trade surplus with the US. A trade war is expected to hurt Chinese manufacturing and raw material imports. However, the US will also likely suffer an economic slowdown as global trade shrinks.

We expect the Dollar to strengthen, driving up long-term Treasury yields, which would be bearish for stocks and bonds.

We also expect a trade war to boost demand for gold as central banks reduce their exposure to US Treasuries.

Acknowledgments

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Tariff Pause

MEXICO CITY/WASHINGTON/OTTAWA, Feb 3 (Reuters) – U.S. President Donald Trump suspended his threat of steep tariffs on Mexico and Canada on Monday, agreeing to a 30-day pause in return for concessions on border and crime enforcement with the two neighboring countries.

U.S. tariffs on China are still due to take effect within hours.

Both Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum said they had agreed to bolster border enforcement efforts in response to Trump’s demand to crack down on immigration and drug smuggling. That would pause 25% tariffs due to take effect on Tuesday for 30 days.

Mexico

Canada

Theatrics

The pause gives Canada and Mexico 30 days to reduce their exposure to the U.S. economy. Otherwise, the whole cycle of abuse begins again.

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