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 improved to 66%, from 56% over the last four weeks. Three of four indicators from Australia and two for China now indicate a risk-on stance, with a combined 60% weighting, while the US Bull/Bear indicator, with a 40% weighting, is 60% risk-off.
NAB forward orders jumped to +3 in October, raising the 3-month moving average above the zero signal line to signal risk-on.
The improvement in forward orders was led by a jump in the mining sector.
Stock Pricing
ASX stock pricing declined to 84.01 percent, from a high of 92.23 percent in August, compared to a low of 67.85 percent in April.
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 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.
ASX market capitalization increased to 1.2 times GDP, the highest since 2021.
Earlier peaks are attributable to the resources sector, with ASX market cap almost doubling during the boom from 2004 to 2007. Both earlier peaks were followed by a steep rise in iron ore prices (marked in red below).
But this time is different. Iron ore prices are falling.
Conclusion
The ASX bull-bear indicator has improved to a mild bull market, but valuation is falling after reaching a new extreme, and the risk of a significant drawdown is 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.