Fundamental Analysis For Stock Market Booms & Busts

Fundamental Analysis & Indicators/Indexes help us to understand the drivers of financial markets, and gain a greater understanding of the potential, or even, likely direction of the stock and bond markets that we are all invested in.

The fundamentals below are predominantly linked to the US economy and stock market as most global stock market funds are 70% to 75% US weighted.

I have listed these fundamentals below as an early warning signal for a downturn or a recession. The top FA indicators are labelled as such in the title. I track these fundamentals for signs of strength or weakness to help make decisions on which assets to be invested in. Alarm bells only really start going off if we see a weakening across the board for a number of these fundamentals. This is when I would think about selling equities/stocks and re-allocating to bonds or other capital preservation assets. But even then, the conditions have to be right to invest in bonds in this day and age (i.e. you need to see lowering inflation on the horizon) ... the 60/40 portfolio is dead and buried IMHO.

Before we launch into the main FA Indicators I track it's worth mentioning a free resource that real students of FA will know and use which covers most FA indicators... click here for Ed Yardeni's excellent list of free charts.

Leading Indicators

Leading indicators for the stock market give us a better idea 'ahead of time' where the stock market might be heading. Hence, leading indicators are high up in this list of fundamentals.

Yardeni Research provides a chart of the main leading indicator indexes (from the Conference Board) which blend a number of the best leading indicators into an index (See image below). Our Leading Indicators page goes into more detail.

The long term FINRA margin deby chart below (Y on Y) is essentially a measure of 'Euphoria' and bubble mentality risk taking in the markets. When the upper level reaches up to 50% to 60% and then goes into reverse, this has consistently matched up with bubble peaks. The last 3 mayor peaks (DotCom, GFC, and post-Covid) all hit 60% and then went into reverse. This 60% level looks consistently accurate at flagging the true top of a longer term bull run.

Recession Risk & Unemployment & Financial Distress Indicators

A Leading indicator for the economy and business cycle is a sustained uptrend in unemployment. This was observed before the 2008 GFC and the 2025 downturn: -

A Leading indicator for the economy and business cycle is a sustained uptrend in unemployment. This was observed before the 2008 GFC and the 2025 downturn: -

When the US Fed Reserve starts cutting rates when the unemployment rate is trending up, its typically becuase they see weakness in the economy... not a good sign. The last 2 major reversals saw rates being cut along with unemployment rising... 

When the US Fed Reserve starts cutting rates after a yield curve inversion its also a sign of a weakening economy and as above, the last 2 times this happened was just before the last 2 major downturns...

When you see 2 or more strong years in the SP500 they tend to be followed by a proportionate downturn (the red yearly candles below ...

Global Demand In The Economy 

One of the main measures of demand in the economy is the  Purchasing Managers Index. We track the US Manufacturing PMI and Global PMI's on a continual basis to help determine if demand is trending up, down or sideways.  The ISM & PMI US Manufacturing PMI may have different values  (above or below 50) so it often helps to also read the Trading Economics summary from each provider to gain a better understanding of where we are heading. (See the link below)

As can be seen in the chart when the PMI trends lower and then crosses below 50 and maintains below 50 then economic demand is in a meaningful contraction which is often accompanied by a full blown recession (grey bars below) or recession like conditions (2022) with accompanying declines in the stock market.

• US Manufacturing PMI (S&P)

• US Manufacturing PMI (ISM)

• Global PMI's (scroll down near the end of the page for the all important US PMI's)

Central Banks & The Almighty Dollar

The dollar as the worlds global reserve currency is the most important currency to track. It's the most influential in terms of the global economy. A strong dollar is not necessarily good news for global stock markets. Both the SP500 and global funds tend to move in the opposite direction to the almighty US dollar. If the stock market rallies into a strengthening dollar it could be a sign of a 'bull trap' with sellers cashing in at the top creating headwinds for the SP500 and therefore our global stock market funds.

For a deep dive <<< CLICK HERE >>>

INFLATION, Oil/Energy & Yields (Leading Indicators)

One of the main signals of a decline in stocks is a rise in inflation. At the time of writing on 2024/25, we need to keep a close eye on the US CPI inflation. After the Covid inflation spike we are seeing the CPI follow an eerily similar path to the 1970 reflation scenario which saw inflation come back even harder. If we start to see inflation trend up from this point, that would be a huge warning sign for stocks...

For a deep dive into Inflation, oil and energy  <<< CLICK HERE >>>

Central bank rates and government bond yields act as guardrails for the financial markets as a whole hence we have a dedicated page which describes what to look for if things are starting to take a turn for the worse...

For a deep dive into central banks interest rates and government bond yields  <<< CLICK HERE >>>

Stock Market Valuation

The Buffet Indicator (Valuation)

Who are we to argue with the 'greatest investor of all time'... the GOAT... the one and only... Warren Buffet? Buffet has used a ratio of the total US stock market valuation to the GDP for a long time and it has served him well! (The chart below goes back to the 1950s).

Only recently Buffet liquidated billions of stocks as his indicator breached the second standard deviation as shown in the chart below. Is the Stock Market overvalued?

Risk-On/Risk-Off & Sentiment

The CNN Fear & Greed Index, the NASDAQ & CTA Machines - Short Term Outlook

CNN Money (the finance arm of CNN) developed a sentiment tool called the “fear and greed index” to gauge the situation in the stock market. The index uses a number of sub-indexes to indicate if market participants are fearful or greedy. The current value of the Fear/Greed indicator is if no interest to us in our quest to detect trend changes, so on the page CNN page below, switch it to the 'timeline' setting and see if there is fear based trend down in the chart. The medium term trend for the F&G index and how that relates to the SP500 over the past few years can be seen in the Macro Micro link...

• CNN: FEAR AND GREED Indicator

• Macro Micro: FEAR & GREED Indicator overlaid with S&P500 

See our Risk-On vs Risk-Off page for a deeper dive

Growth vs Defensives

We recently hit a quarter century low in XLP (defensive consumer staples) against SPY (SP500 growth). The last time this level reached was just before the peak before the Dot Com Crash as marked out in the chart below...

Global Markets & Stock Market Price Action Indicators 

As we know, The US SP500 is our main focus as it will be where most standard funds are invested, but if there is weakness in the global markets and economy then it could start to affect the US so it's something to keep an eye on as part of our fundamental analysis for the overall health of out global stock market fund we are invested in.

Global Blue Chips & Markets

The Global Dow is a 150-stock index of corporations from around the world, created by Dow Jones & Company. Only the largest blue-chip stocks are included in the index. The market cap-weighted global funds that our pensions and investments will be invested in are effectively contained this index so its another clue as to where our global funds are heading...

LIVE CHART...

THE KOSPI
The South Korean stock market (KOSPI) closely reflects the fortunes of the global economy. Everything is represented in the index from autos and shipping to microchips. The KOSPI peaked back in May 2021! That's getting on for 3.5 years and has recently taken a another turn down. This backs up the claim that the global economy is slowing as demand continues to decline... 

What Are The Big Boys Saying 

The Big banks pour millions into Researching where we are heading. Whilst it is wise to hear what they have to say they don't necessarily have the best trach record predicting where the stock market is going and there must be an element of bias in what they say as they of course, want to keep people invested in the stock market. Check out our Forecast page.