US Stock Market
The composite valuation indicator uses the secondary axis on the right.
US Bull-Bear
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.
The 10-year/3-month Treasury yield spread has been positive for more than 120 days, and the S&P 500 is above its 12-month weighted moving average, confirming the risk-on signal.
The new Fed Chair, Kevin Warsh, wants to eliminate Fed guidance.
For Warsh, saying less is a virtue. It protects the committee’s judgment. If policymakers issue a forecast, they start crediting evidence that confirms it and discounting evidence that doesn’t. He also believes a quieter Fed gets a cleaner read on what investors think about the economy, rather than hearing an echo of its own guidance. Investors “are upset with me already that I’m somehow not feeding them all the information they’d gotten before,” he told lawmakers. (WSJ)
Warsh's tight-lipped approach will likely fuel greater bond market volatility, driving up long-term yields. A steeper yield curve would restrict demand growth and help to curb inflation.
The latest FOMC meeting kept the fed funds rate target range unchanged at 3.5%-3.75%. There have been no rate cuts for more than 75 days, so the signal has reverted to risk-on.
US heavy truck sales slowed to 38,900 units in July, down from 40,700 in June. The 12-month average fell to 31,200 and would need to reverse by 10% for the risk-off signal to switch 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.
US 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 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.
Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins.
The ratio of stock market capitalization to GDP is more than double its long-term average of 1.2. Buffett considers values above 2.0 to indicate that stock prices are dangerously high.
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 Dotcom bubble in 1999-2000, with values far above their long-term average of 22.4.
The S&P 500 Price-Earnings (PE) ratio, based on the highest trailing earnings, remains high when compared with the long-term average of 17.3.
The Forward PE for stocks in the Dow Jones Industrial Average uses a 20% trimmed mean to mitigate the impact of outliers.
We use a 20% trimmed mean of the Price-to-Sales ratio across the 30 stocks in the Dow to remove the most extreme readings that would otherwise distort the ratio.
The change in the Dow Jones index composition on June 29, 2026 may have contributed to the recent jump, when Alphabet Inc. (GOOGL) replaced Verizon (VZ) in the index.
Conclusion
The US Bull-Bear indicator, led by the transportation sector, flags a bear market, while the composite Stock Pricing indicator warns that stocks are extremely over-priced.
ASX Stock Market
ASX Bull-Bear
The ASX Bull-Bear Leading Index signals a mild bear market.
Australian leading indicators have a 40% weighting in the ASX Leading Index, China 20%, and the US Leading Index carries the remaining 40%.
The ASX 200 Financials Index (XFJ) is above its 50-week weighted moving average, continuing the risk-on signal.
The ASX 200 is above its 50-week moving average relative to Gold, but the long-term downtrend continues, with no higher troughs. The signal remains risk-off.
Performance of the ASX 200 Index relative to Gold (in Australian Dollars) reflects the real return on Australian Stocks.
ASX Stock Pricing
ASX stock pricing indicates that stocks are overvalued, but not as extreme as the US market.
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 stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.
The Warren Buffett indicator compares stock market capitalization to GDP, providing a stable, long-term ratio with a long-term mean of 1.03.
The Price-to-Sales ratio for stocks in the ASX 20 uses a 20% trimmed mean to remove the highest and lowest readings, which tend to distort the average.
The Forward Price-Earnings ratio for stocks in the ASX 20 uses a 20% trimmed mean to eliminate the highest and lowest readings. This avoids distortions of the average by outliers.
The All Ordinaries dividend yield is below its long-term mean of 4.1%, indicating values are on the high side. A fall below the 3.0% threshold would signal that stocks are extremely overpriced.
Note: Lower yields indicate higher values, so we reverse the z-score for the ASX dividend yield.
The S&P 500 Price-Earnings (PE) ratio, based on the highest trailing earnings, remains high when compared with the long-term average of 17.3.
The All Ordinaries price-to-earnings (PE) ratio PEs above 20 indicate high pricing. We need to ignore the 2020 distortion caused by low earnings.
The PE ratio is based on the latest trailing earnings (red below), but produces extreme readings if earnings per share (EPS) rises or falls sharply, as in 2008 or 2020, which is why we also calculate a PE based on the highest trailing earnings.
Conclusion
The ASX Bull-Bear indicator signals the early stages of a bear market, while the composite Stock Pricing indicator signals stocks are over-priced. China is on bear watch after NBS Manufacturing PMI fell sharply to 49.2 in July, close to its risk-off signal.
Related Links
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.
