Tag: Price-to-Sales Ratio

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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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A slow-motion train wreck

Facebook parent Meta’s shares fell 20% after hours as it said revenue growth will slow, partly because users were spending less time on lucrative services. (WSJ)

Meta Platforms (FB)

Facebook lost about half a million global daily users in the fourth quarter of 2021 compared to the previous quarter, according to the quarterly earnings report of Meta, its parent company. That might not seem like a major drop relative to its under 1.93 billion total daily active users, but it represents a low point for a metrics-driven company whose user base long grew at a rapid pace across its different apps. The statistic shows how Meta has struggled to stay relevant to younger users, many of whom are drawn to competing apps like TikTok. (Vox)

Facebook/Meta’s dissapointing performance is not an isolated problem. Tesla (TSLA), the darling of retail investors — trading at 22 times sales and 93 times forward earnings — is also staring into the abyss. Breaking primary support at 900 last week, TSLA quickly recovered — indicating a false break — but is again testing the 900 support level. Trend Index peaks below zero warn of selling pressure. Breach of support at 900 for a second time would confirm a primary down-trend. Initial target for a decline would be 600 — a 50 per cent fall from its recent peak of 1200.

Tesla (TSLA)

Jesse Felder shows how precarious the market situation is, with the median price-to-sales ratio at a record 3.5 times. Compare that to the Dotcom bubble, with a peak of just 2.0.

Median Price to Sales ratio

Warren Buffett’s favorite market valuation metric of market-capitalization-to-GDP is not quite as alarming, when you compare to the Dotcom peak in 2000, but nevertheless sounds a grim warning.

Market Cap/GDP

We consider MarketCap/GDP to be the most accurate long-term valuation metric available. By focusing on total stock market valuation relative to output, it avoids distortions caused by the financial trickery of stock buybacks and fluctuating profit margins caused by factors like the current supply chain issues.

Conclusion

This is like watching a slow-motion train wreck. The worst I have seen in nearly forty years in financial markets. The Fed may be able to postpone a market crash by several months but the eventual outcome is inevitable. The draw-down has the potential to be truly eye-watering, overshadowing the Dotcom Crash and Global Financial Crisis.

We are overweight Gold (including gold miners), defensive stocks, and key commodities and underweight high-multiple growth stocks.

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