Global Equities: Rising Risk Of A Pullback

Global Equities: Rising Risk Of A Pullback

This article looks at a unique indicator for global equities that captures quite a different kind of market breadth: market valuation breadth. The main takeaway is that it has moved into the danger zone.

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The chart appeared in the latest edition of the Weekly Macro Themes report and points to an elevated risk of a pause or a pullback for global equities.

The indicator counts the number of countries with forward PE ratios trading above their longer term average. This is a loose proxy for saying how many countries are “expensive” (trading above their long term average) vs “cheap”.

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Given it is a breadth measure it tells you what proportion of countries are seeing more expensive forward PE ratios - similar to the traditional moving average breadth indicators.

In the past whenever this indicator has spiked higher it has usually coincided with a short-term pause or correction - and in some cases has flagged the start of a bear market.

So at this point you would have to say the risk of a pause or a pullback is elevated, based on this indicator alone.

Given the rest of our indicators, such as those focused on earnings and the economic cycle are still looking good, at this stage we would consider this to be more of a correction risk rather than a bear market risk.  Were the economic indicators to start materially deteriorating it would be a different story.

So remember, while history doesn't necessarily repeat, as the chart shows, it often rhymes.

This article originally appeared as a submission at See It Market

Article by Callum Thomas, Top Down Charts

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Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.
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