ASX Pricing climbs to a new extreme

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 drawdown risk.

Bull/Bear Market

The fall in the US leading indicator dragged the ASX Bull-Bear Market indicator down to 56%, back into a bear market, from 64% last Friday. The decline is due to the US index’s 40% weighting in the ASX Bull/Bear indicator.

ASX Bull-Bear Market Indicator

Two of the remaining six indicators, from Australia and China, signal risk-off, with a combined weighting of 60% in the ASX Bull-Bear Index.

Australian private dwelling approvals jumped to 16.7K in June, lifting the 3-month moving average above its long-term signal line and reversing the risk-off signal from last month.

Australian Private Dwelling Approvals

However, China’s National Bureau of Statistics Manufacturing PMI retreated to a bearish 49.3 in July from 49.7 in June. A fall below 49.0 would signal risk-off.

China NBS Manufacturing PMI

Stock Pricing

ASX stock pricing climbed to a new high of 91.23 percent from 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 climbed to 18.0 times highest trailing earnings in July, a level only exceeded during the Dotcom bubble and the boom before October 1987.

All Ordinaries PE of Highest Trailing Earnings

Conclusion

The ASX is back in a bear market, while valuations climbed to a new extreme, increasing the risk of a significant drawdown.

Acknowledgments

US Leading Indicator slips to 40%

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 declined to 40% from 60% last week, with heavy truck sales moving to risk-off:

Bull-Bear Market Indicator

Heavy truck sales declined to 37.1K units in July, with the 12-month moving average falling to 38.6K. Heavy truck sales are a reliable indicator of transport activity and business confidence. A decline of the 12-month MA by more than 10% from its October 2023 peak at 43K signals risk-off.

Heavy Truck Sales (Units)

Stock Pricing

Stock pricing climbed to a new high of 97.81 percent, compared to a low of 95.04 percent in April and an earlier high of 97.79 percent in February. The extreme reading warns that stocks are at 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 forward price-earnings ratio for the S&P 500 is close to the highest level in the last century, apart from the Dotcom bubble in 2000. The current reading of 24.5 is more than a 50% premium to the long-term average of 16.1 (since September 1974).

S&P 500 Forward PE

The S&P 500 PE is 28.6 times the highest trailing earnings, compared to 33.8 during the Dotcom bubble and a long-term average of 17.3 (since 1974).

S&P 500 PE of Highest Trailing Earnings

Conclusion

The composite leading indicator signals a bear market, while extreme pricing highlights the risk of a significant drawdown.

Acknowledgments

Notes

Truckers anticipate a slowdown

Key Points

  • The weekly Bull/Bear market indicator for the US declined to 40% on a further drop in heavy truck sales
  • The US decline also affected the ASX indicator, which fell to 56%
  • Long-term Treasury yields and the dollar are weakening, boosting support for gold

Bull/Bear Market Indicator

US Bull/Bear Market

The Bull/Bear indicator declined to 40% from 60% on Friday, with heavy truck sales signaling risk-off:

Bull-Bear Market Indicator

Heavy truck sales declined to 37.1K units in July, with the 12-month moving average falling to 38.6K. Heavy truck sales are a reliable indicator of transport activity and confidence in the economic outlook. Decline of the 12-month MA by more than 10% from its October 2023 peak at 43K signals risk-off.

Heavy Truck Sales (Units)

The fall also affected the Australian indicator, which slipped to 56% from 64% last Friday, indicating a mild bear market.

Bull-Bear Market Indicator

The decline is due to the US index’s 40% weighting in the ASX Bull/Bear indicator.

ASX Bull-Bear Market Indicator

Stocks

The S&P 500 recovered from Tuesday’s fall, but the declining Trend Index warns of weak sentiment.

S&P 500

The Dow Jones Industrial Average stalled at 44K and has not yet confirmed the S&P 500 bull market signal with a breakout above 45K. Again, declining Trend Index peaks warn of bearish sentiment.

Dow Jones Industrial Average

Financial Markets

Strong liquidity in financial markets supports stocks. The Chicago Fed National Financial Conditions Index remains in a strong downtrend, indicating loose monetary conditions, despite an upturn to -0.535 from -0.565 last week.

Chicago Fed National Financial Conditions Index

Bitcoin remains in an uptrend, indicating bullish sentiment, closely correlating with financial market liquidity.

Bitcoin (BTC)

Treasury Markets

Long-term Treasury yields remain weak, testing support at 4.2%, but this is a bear signal, anticipating Fed rate cuts in response to a slowing economy.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index also weakened, with the Fed expected to cut rates. The decline is headed for a test of support at 97.

Dollar Index

However, a narrowing trade deficit would reduce the supply of dollars in international markets as international borrowers and importers need to meet dollar-denominated commitments. The Fed would normally alleviate the shortfall by issuing swap lines to foreign central banks, but we live in an uncertain world. The US Treasury could object to the Fed’s accommodation if the mood takes them.

BEA: Trade Deficit

Gold benefited from dollar weakness in the last few days. Narrow consolidation above support at $3,360 per ounce is a bullish sign, and a breakout would signal a fresh test of recent highs.

Spot Gold

Gold Revaluation

The Bitcoin Reserve Act Bill is currently circulating in Congress. Its stated aims:

To establish a Strategic Bitcoin Reserve and other programs to ensure the transparent management of Bitcoin holdings of the Federal Government, to offset costs utilizing certain resources of the Federal Reserve System, and for other purposes.

Section 9 includes a provision to revalue US gold reserves. Treasury owns the gold and issues gold certificates to the Fed, currently at a book value of $42.222 per troy ounce.

The Bill proposes that the Treasury revalue its gold holdings and issue new certificates in exchange for the existing ones held by the Fed. The Fed will credit the difference in value between the new and old certificates to the Treasury General Account (TGA) on its balance sheet. The result is inflationary as the Treasury can use the credit to buy Bitcoin, repay debt, or otherwise spend as Congress directs.

According to Fiscal Data, the US Mint holds 7,628 metric tons of gold in deep storage at Fort Knox, Denver, and West Point. Revaluing by $1,000 per ounce would enable a credit of $245 billion to the TGA. While not exactly earth-moving, the Bill provision highlights how Treasury could benefit from a higher gold price.

Conclusion

Heavy truck sales are the latest sign that US economic growth is slowing.

Long-term Treasury yields are weakening, and so is the dollar. Demand for gold has strengthened, and a follow-through above the last few days’ consolidation would signal a re-test of recent highs above $3,400 per ounce.

Acknowledgments

Weak labor report hammers stocks

Key Points

  • The S&P 500 and Dow fell sharply on the poor July jobs report
  • Financial markets warn of easy credit conditions, which could lead to markets mispricing risk
  • Real GDP growth is misleading due to the buildup of inventories in Q1, ahead of tariffs, and their subsequent rundown in Q2
  • Long-term Treasury yields fell, and the dollar weakened, anticipating lower interest rates
  • The fall boosted demand for gold

July payrolls increased by 73K, below the estimate of 104K, but big downward revisions to the previous two months spooked investors. A combined revision of -258K to May and June employment lowered job gains to 19K and 14K, respectively.

Employment Growth

Stocks were hammered, with the S&P 500 displaying a bearish engulfing on the weekly chart. Breach of support at 6200 would signal a correction to test 6000.

S&P 500

The Dow Jones Industrial Average failed to confirm the S&P 500 bull market signal and has now broken support at 44K, warning of a correction to 42 K.

Dow Jones Industrial Average

Financial Markets

The Chicago Fed National Financial Conditions Index warns of further easing with a fall to -0.57, signaling loose monetary conditions similar to 2021 during the COVID pandemic.

Chicago Fed National Financial Conditions Index

During the week, we highlighted the risk of a credit bubble if super-easy financial conditions persist:

Looser monetary policy would accelerate credit growth (light blue) above the nominal GDP rate (dark blue), leading to malinvestment as in the credit bubble preceding the 2008 global financial crisis. Mispricing risk feeds instability, leading to an inevitable collapse when assets reprice.

Bank Credit & Nominal GDP Growth

Bond market guru Jim Grant today confirmed the worrying speculative bonanza:

It’s a speculative-credit bonanza. Freewheeling conditions in the primary market pushed leveraged loan activity to new heights in July, with domestic new issuance reaching $223.2 billion. That’s the largest one-month total on record, comfortably topping the prior $206 billion peak established in January….

“I haven’t seen a market quite like this post the Great Financial Crisis,” Jon Poglitsch, managing director at Sycamore Tree Capital Partners, marveled to Bloomberg Wednesday. There’s a “grab for spread where anyone can find it,” he noted.

Loose financial conditions will likely be exacerbated if the Fed caves to political pressure and cuts interest rates, risking a credit bubble.

Treasury Markets

The weak jobs report swept aside concerns over the uptick in June core PCE inflation to 2.8%.

PCE & Core PCE

10-year Treasury yields plunged, anticipating Fed rate cuts, testing long-term support at 4.2%.

10-Year Treasury Yield

Economy

Real GDP growth recovered to an annualized rate of 2.9% in Q2, but the numbers are misleading. The biggest contributor was a sharp reduction in inventories after massive Q1 pre-orders, front-running the tariffs announced by President Trump in April. The contraction in Q2 aggregate hours worked reveals a far gloomier picture.

Real GDP & Total Hours Worked

A 50K July decline in employment in cyclical sectors — manufacturing, construction, transportation, and warehousing — warns that the economy is slowing.

Cyclical Employment

Labor Market

Job openings and unemployment remain in balance, as highlighted by Chair Powell at this week’s FOMC announcement.

Job Openings

Annual growth in average hourly earnings at 3.9% reflects reasonable labor demand.

Average Hourly Earnings

Dollar & Gold

The US Dollar Index fell sharply on the July jobs report, anticipating lower interest rates ahead.

Dollar Index

The fall boosted demand for gold, which is testing resistance at $3,360 per ounce. Breakout would signal a test of $3,440.

Spot Gold

Conclusion

A weak jobs report, with falling employment in cyclical sectors, warns that the economy is slowing. Stocks are expected to undergo a correction, with the S&P 500 testing support at 6000 and the Dow testing 42K.

Interest rates are expected to fall, with the Fed cutting rates to create a soft landing. Lower interest rate expectations have also weakened the dollar and boosted demand for gold.

Easy credit conditions increase the risk of a credit bubble, which could lead to investors mispricing risk.

We are underweight stocks except for defensive sectors, and overweight cash, gold, and short-term financial assets.

Acknowledgments

ASX Market 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 drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator reverted to 64%, from 54% two weeks ago. Two of six indicators from Australia and China signal risk-off, with a combined weighting of 60% in the ASX Bull-Bear Index, while the US Bull-Bear Index, with a 40% weighting, completes the balance.

ASX Bull-Bear Market Indicator

Australian private dwelling approvals jumped to 16.7K in June, lifting the 3-month moving average above its long-term signal line and reversing the risk-off signal from last month.

Australian Private Dwelling Approvals

However, China’s National Bureau of Statistics Manufacturing PMI was bearish, retreating to 49.3 in July from 49.7 in June. A fall below 49.0 would signal risk-off.

China NBS Manufacturing PMI

Stock Pricing

ASX stock pricing climbed to a new high of 89.17 percent, well above the 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 20% trimmed mean of ASX 20 stocks’ price-to-sales ratio reached a new high of 4.71 since 2015.
ASX 20 Price-to-Sales Ratio (20% Trimmed Mean)

Forward price-earnings for the ASX 20, also calculated as a 20% trimmed mean to remove outliers, is at a new high since data collection started in 2019.

ASX 20 Forward Price-Earnings Ratio (20% Trimmed Mean)

Conclusion

The ASX bear market signal improved slightly, but valuations reached a new extreme, increasing the risk of a significant drawdown.

Acknowledgments

US Market 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 60%, with two of five leading indicators signaling risk-off:

Bull-Bear Market Indicator

Financial market liquidity is climbing, with the Chicago Fed National Financial Conditions Index declining to -0.57, indicating easy monetary conditions.

Chicago Fed National Financial Conditions Index

However, declining manufacturing jobs have caused a 50K decline in cyclical sector employment since June. The decline is less than the 300K needed for the cyclical jobs indicator to signal risk-off, but unsettled stock investors, with both the Dow and S&P 500 indicating a correction.

Cyclical Employment

Stock Pricing

Stock pricing climbed to 97.57 percent, compared to a low of 95.04 percent in April and a high of 97.79 percent in February. The extreme reading warns that stocks are at 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.

Estimated stock market capitalization at the end of June soared to a new high compared to GDP for the past year. At 2.85, Warren Buffett’s favorite long-term indicator of market value is more than double its 1.17 long-term average and more than 50% higher than the 2000 high of 1.89 during the Dotcom bubble.

Stock Market Capitalization/GDP

Conclusion

Stocks are bordering on a bear market, while extreme stock pricing raises the risk of a significant drawdown.

Acknowledgments

Notes

ASX Market 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 drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 54%, after declining from 64% two weeks ago. Three of six indicators from Australia and China signal risk-off, with a combined weighting of 60% in the ASX Bull-Bear Index. The US Bull-Bear Index, with a 40% weighting, completes the balance.

ASX Bull-Bear Market Indicator

The ASX 200 Financials Index (XFJ) retreated below its breakout level at 9250, warning of a correction. However, the index remains in a primary uptrend, signaling risk-on.

ASX 200 Financials Index

Stock Pricing

ASX stock pricing slipped to 87.12 percent from its new high of 87.85 percent last week, but well above the 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.

Conclusion

The ASX is in a mild bear market, while the extreme valuation increases the risk of a significant drawdown.

Acknowledgments

US Market 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 60%, with two of five leading indicators signaling risk-off:

Bull-Bear Market Indicator

The Chicago Fed National Financial Conditions Index declined to -0.55, with expanding liquidity supporting financial markets.

Chicago Fed National Financial Conditions Index

Stock Pricing

Stock pricing climbed to 97.50 percent, compared to a low of 95.04 percent in April and a high of 97.79 percent in February. The extreme reading warns that stocks are at 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 Shiller CAPE ratio compares the current S&P 500 index value to 10 years of inflation-adjusted earnings. The CAPE ratio of 38.33 is the highest outside of the Dotcom bubble in 2000.

S&P 500 Shiller CAPE

The forward price-earnings ratio is also at an extreme reading of 24.5, compared to the fifty-year average of 16.3.

S&P 500 Forward Price-Earnings Ratio

Conclusion

We are bordering on a bear market. The bull-bear indicator is still at 60%, but extreme stock pricing increases the risk of a significant drawdown.

Acknowledgments

Notes

S&P 500 weakens and gold rallies

Key Points

  • The S&P 500 closed above 6300 for the first time, supported by strong liquidity
  • But declining Trend Index peaks warn of a retracement
  • Consumer Confidence remains weak, and the Conference Board Leading Economic Index signals a recession
  • Gold and silver rallied as the dollar weakened

The S&P 500 closed above 6300 for the first time, but declining Trend Index peaks warn of selling pressure. Expect retracement to test support at 6100.

S&P 500

The Dow Jones Industrial Average also signals weakness, with declining Trend Index peaks indicating selling pressure.

Dow Jones Industrial Average

The Broad DJ US Index (red) has underperformed the DJ World ex-US index (blue) over the past six months.

DJ US Index ($DJUS) & DJ World ex-US ($W2DOW)

Financial Markets

Financial markets grow increasingly supportive, with the Chicago Fed National Financial Conditions Index (NFCI) declining to -0.54. Values above zero are considered restrictive.

Chicago Fed National Financial Conditions Index

Bitcoin has retraced slightly from resistance at $120K, but still signals bullish market conditions.

Bitcoin (BTC)

Treasury Markets

10-Year Treasury yields declined to 4.35%, but rising Trend Index troughs signal continued buying pressure.

10-Year Treasury Yield

Economy

Consumer confidence remains low, with the Conference Board index declining by 5 points to 93, similar to levels during the 2020 pandemic.

June’s retreat in confidence was shared by all age groups and almost all income groups. It was also shared across all political affiliations, with the largest decline among Republicans.

Conference Board: Consumer Confidence

The Conference Board’s Leading Economic Index (LEI) declined to 99.8% in June. Six-month growth in the LEI (blue) fell to an annualized -5.6%, below the -4.1% that signals a recession (marked in red).

Conference Board Leading Economic Index - Recession Signals

The black line on the above chart indicates negative growth in more than 50% of the LEI components below over the past six months. A broad decline confirms the recession signal.

Conference Board Leading Economic Index - Components

Dollar & Gold

The Dollar Index retreated below support at 98, signaling another decline. A breach of support of 96.50 would strengthen our long-term target of 90.

Dollar Index

Gold rallied to test resistance at $3,400 per ounce. A breakout above $3,400 would offer an immediate target of $3,500 and strengthen our year-end target of $4,000.

Spot Gold

Silver is testing resistance at $39 per ounce. A breakout would offer a target of $42, but declining Trend Index peaks warn of stubborn resistance.

Spot Silver

Conclusion

The S&P 500 closed at a new high, but declining Trend Index peaks warn of selling pressure.

The Dow Industrial Average respected resistance at 45,000, failing to confirm the S&P 500 bull market signal.

Financial market conditions indicate strong liquidity, but consumer confidence is weak, and the Conference Board Leading Economic Index signals a recession.

The US Dollar Index retreated below support at 98, triggering a rally in gold and silver. A gold breakout above $3,400 would offer an immediate target of $3,500 and strengthen our year-end target of $4,000. A silver breakout above $39 would offer a target of $42, but declining Trend Index peaks warn of stubborn resistance.

Acknowledgments

ASX Market 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 drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 54%, after declining from 64% two weeks ago. Three of six indicators from Australia and China signal risk-off, with a combined weighting of 60% in the ASX Bull-Bear Index, while the US Bull-Bear Index makes up the remaining 40%.

ASX Bull-Bear Market Indicator

The ASX 200 is in a strong uptrend but has lost nearly 60% relative to gold (in Australian Dollars) over the past ten years.

China: OECD Composite Leading Indicator

Stock Pricing

ASX stock pricing jumped sharply, reaching a new high of 87.85 percent, from 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 20% trimmed mean of forward PE ratios in the ASX 20 climbed to 23.33 times earnings. The 96.44th percentile warns that pricing is extreme.

ASX 20 20% Trimmed Mean of Forward PE

Conclusion

The ASX is now in a mild bear market, while the extreme valuation increases the risk of a significant drawdown.

Acknowledgments