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 because market valuation is high, but advise caution when adding new positions.
Bull/Bear Market
The ASX Bull-Bear Market indicator remains at 66%, up from 56% three weeks ago. Three of four indicators from Australia and two for China indicate a risk-on stance, with a combined 60% weighting, while the US Bull/Bear indicator, which makes up the balance, is only 40% risk-on.
The November update for China NBS Manufacturing PMI is due for release tomorrow at 9:30. A decline below the October level of 49.0 would signal risk-off.
The ASX 200 Financials index (XFJ) continues to test support at 9000, while the Trend Index has crossed below zero, indicating rising selling pressure. A breach of 9000 would offer a target of primary support at 8000.
Stock Pricing
ASX stock pricing increased to 83.02 percent, well below the August high of 92.23 percent, but remains extreme compared to the April low of 67.85 percent.
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 that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.
Conclusion
The ASX bull-bear indicator indicates a mild bull market, but that could change if the Chinese NBS Manufacturing PMI falls tomorrow. Valuation is declining after reaching a new extreme, and the risk of a significant drawdown remains high.
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
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.