US Market Leading Indicators

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while 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

Weekly continued claims increased to 1.974 million on June 14, warning that the labor market is deteriorating. Unemployment was at 4.2% in May, but will likely rise in the next few months.

Continued Claims & Unemployment Rate

Stock Pricing

Stock pricing increased to 96.96, compared to a low of 95.04 ten weeks ago 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.

Robert Shiller’s CAPE compares the S&P 500 index against a ten-year average of inflation-adjusted earnings. CAPE increased to 37.29, approaching its December 2021 high of 38.31, which was only previously surpassed during the Dotcom bubble of 1999-2000.

Robert Shiller's CAPE

The previous high was 32.56, before the stock market crash of October 1929, shown on Shiller’s long-term chart below.

Robert Shiller's CAPE

Conclusion

We are in the early stages of a bear market, with the bull-bear indicator at 60%. Extreme stock pricing increases the risk of a significant drawdown.

Acknowledgments

Notes

On Investment Time Horizons – Seeking Alpha

David Merkel observes that Shiller’s CAPE10 ratio and Tobin’s Q-ratio both “indicate that stocks are not likely to return a lot over the next 10 years”.

The CAPE10 ratio is a long-term, smoothed PE-ratio first popularized by Yale Professor Robert Shiller in his book Irrational Exuberance. CAPE10 compares the current S&P 500 index value to the average of the last 10-years annual earnings. James Tobin’s Q-ratio compares current price to net worth (total company assets minus liabilities).

Merkel points out, however, that “the same is true of most high-quality bond investments …. and high-yield investments when expected losses are netted out…..I am not crazy about buying bonds here. The risk-reward is awkward, but the same is true of stocks.”

Bottom line is investors are being starved of yield by the Fed’s Twist and QE3 operations. Investors may be forced to take on additional risk in order to boost yields, but that could end in disaster, with capital losses if yields rise or earnings fall. Where possible, the safest strategy would be to tighten your belt and sit this out.

via On Investment Time Horizons – Seeking Alpha.