The gauge on the left indicates whether the market is in a bull or bear phase, and the indicator 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 valuations are high; however, we recommend exercising caution when adding new positions.
Bull/Bear Market
We have revised the bull-bear market leading indicator to improve its responsiveness, stripping it down to a composite of five key indicators. At present, two of the five indicators signal risk-off, indicating medium risk of a US bear market.
Cyclical Employment
Cyclical employment increased to 27.603 million in August from 27.550 million in July. A 300,000 decline from the September 2024 peak of 27.671 million would signal risk-off.
Heavy Truck Sales
US heavy truck sales slowed to 36,500 units in August from 38,900 in July. The 12-month average ticked up to 33,000 from 32,800. However, it would need to reverse by 10% for the risk-off signal to reverse to risk-on.
Heavy truck sales reflect the transportation industry's confidence in the economic outlook. A fall of more than 10% below the preceding peak signals risk-off, while a 10% rise above a trough indicates risk-on.
Stock Pricing
US stock pricing remains at extreme levels. We changed the composition of the Forward PE and Price-to-Sales indicators at the end of April 2026, so earlier highs are not directly comparable.
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 average the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.
The Dow Jones 30 Trimmed Mean of Forward PE fell to 20.53 from 21.88 last week, causing the composite stock pricing index to drop sharply to 96.08% from 97.94%.
Shiller CAPE
Robert Shiller's CAPE smoothes out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings.
The current advance on the CAPE ratio is the second-highest in history, behind only the 1999 peak during the Dotcom bubble at 44.2, with values far above their long-term average of 22.4.
Conclusion
The Bull-Bear indicator suggests the US economy is slowing, but not yet in a recession.
Pricing is growing more extreme, increasing the risk of a significant drawdown.
Acknowledgments
- Prof. Robert Shiller: CAPE 10 Data
- S&P Global: S&P 500 Sales and Earnings Estimates
- University of Michigan: Survey of Consumers
- Federal Reserve of St Louis: FRED Data
- Bureau for Economic Analysis: Motor Vehicles Data
Managing Risk
To find out more, go to Managing Risk on the top menu, or see:
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
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.
