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 Bull/Bear Market indicator remains at 60%, with the two yield-curve indicators signaling Risk-off:
The Fed is cutting interest rates which usually flags a bear market.
However, financial market conditions remain ultra-easy. Also, the coincident economic index (below) held above its 2.5% threshold in November, heavy truck sales are robust, and employment in cyclical sectors is close to record highs.
Stock Pricing
Stock pricing eased to the 97.90 percentile from 97.99 last Friday. The extreme reading warns that stocks remain at risk of a significant drawdown. Stock valuations, however, give no indication as to market timing:
Markets can remain irrational a lot longer than you and I can remain solvent. ~ A.Gary Shilling (1986)
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.
Conclusion
We are at the cusp of a bear market, with the bull-bear indicator at 60%, and stock pricing is extreme, warning of the risk of large drawdowns.
