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
The Bull/Bear indicator remains at 40%, warning of a bear market ahead, with three of five indicators signaling risk-off.
Heavy truck sales were revised down to 28,300 units in January, from an earlier estimate of 34,500. Declining investment in new trucks reflects a lack of participants’ confidence in the transportation sector, indicating slowing economic activity.
Stock Pricing
We have had to exclude the Forward PE valuation for the S&P 500 as S&P Dow Jones no longer provides forward estimates of earnings.
Our average stock pricing score increased to a new high of 98.87 percent, compared with the October 2025 high of 98.66 percent and the April 2025 low of 95.04 percent. The extreme pricing warns that stocks are at risk of a significant drawdown.
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 calculate an average of 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 S&P 500 index is at a PE ratio of 29.4 times highest trailing earnings. Before 1996, during the Dotcom bubble, the ratio had never exceeded 20-times earnings in almost 100 years, even during the peaks prior to the October 1929 crash and Black Monday in October 1987.
Conclusion
The bull-bear indicator at 40% warns of a bear market ahead, while extreme price levels indicate an elevated 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.
