The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market drawdown risk.
Bull/Bear Market
The Bull/Bear indicator remains at 40%, warning of a bear market ahead.
The Chicago Fed National Financial Conditions Index declined to -0.555, indicating easy monetary conditions are supporting stocks and bonds.
Continued unemployment claims increased to 1.972 million on August 9, but the unemployment rate held steady at 4.2% in July. Fed Chair Powell highlighted the changing labor market dynamics in his Jackson Hole address on Friday. Job gains may decline due to falling immigration, but rising unemployment claims indicate a slowing economy. A rising unemployment rate for August would confirm a weakening labor market and open the door to a Fed rate cut in September.
Stock Pricing
Stock pricing increased to a new high of 97.98 percent, compared to a low of 95.04 percent in April. The extreme reading warns that stocks are at risk of a significant drawdown.
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 edged higher to 38.7, the highest ever recorded outside of the Dotcom bubble. CAPE compares the current S&P 500 index to a ten-year average of inflation-adjusted earnings.
The S&P 500 price-to-sales ratio of 3.08 is the highest since our data began in 2000, and more than 70% above our long-term average of 1.78.
Conclusion
The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases 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
Notes
- See Managing Risk to learn more.
- See Bull-Bear and Stock Valuation for more on our composite market indicators.
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.