By Dr. Steve Sjuggerud

Monday, July 17, 2017

"Investors are pulling out of stocks," my friend Jason Goepfert wrote this week on his SentimenTrader website.

Specifically, he said, "In early July, investors pulled more than $11 billion from domestic equity funds." As he notes, that's "a huge outflow."

And it tells me that investors are scared.

Are you scared?

I get it. Stocks are hitting record highs. And they're now extremely expensive.

Let me show you where we stand... And then I'll tell you what I think we should do with our stock investments right now...

Stocks are having a great year. And the S&P 500 has returned more than 300% since bottoming in March 2009.

These big gains have led to worryingly high valuations... Based on one measure, the S&P 500 just hit its most expensive level since 2000.

That is, the S&P 500's price-to-sales (P/S) ratio just hit its highest level in 17 years.

This ratio is a simple valuation tool... It might even be the simplest one. It's useful, too... Since it looks at the "top line" number – before all the math that gets to the "bottom line" – it lowers the risk of accounting shenanigans. We call it "one of the best ways to measure real value in the stock market."

At the market bottom in 2009, the S&P 500's P/S ratio fell to less than 1. Stocks were cheap.

But that has reversed since... Stocks have soared, and the P/S ratio recently rose to about 2. That's its highest level since 2000. Take a look...

That's a scary chart. Valuations have moved dramatically higher in recent years. And seeing prices near dot-com-bubble levels is frightening.

Should you worry?

Consider this...

The P/S ratio just broke above 2. During the 1990s bull market, the P/S rose above that level in December 1998.

Was selling then a good idea? Heck no! You would have missed out on another 26% gain in the S&P 500. And the Nasdaq Composite Index went on to soar another 131% from there, too.

So while it's rare for the S&P 500's P/S ratio to break above 2... by itself, that isn't a reason to sell.

More importantly, don't let one valuation metric scare you out of the market. The P/S ratio isn't the only way to size up stock prices.

If we look at two other popular measures – the price-to-earnings (P/E) and price-to-book (P/B) ratios – we see something different...

These two measures are still well below their 2000 bubble peaks. The P/E ratio would need to increase 34% to hit its 2000 high... And the P/B ratio would need to rise 59%.

These metrics don't say that stocks are cheap. But they aren't flashing bubble warnings, either.

Stocks are getting more expensive, no doubt. The P/S ratio just hit a 17-year high. And other measures are high as well.

But the important point today is that valuations – by themselves – don't kill bull markets.

Please keep in mind, the final innings of a great bull market often deliver massive gains. I call this phase the "Melt Up."

You don't want to get scared like everyone else today. You want to be on board for the Melt Up phase.

When everyone else STOPS worrying... when everyone else is PILING INTO the markets, not PULLING OUT of the markets... THAT'S when we want to worry.

We're not there yet.

The Melt Up is here... Investors are scared, but the trend is up. It's a perfect setup.

Based on that, the smart move is to stay in stocks until that changes.

Good investing,

Steve

Further Reading:

Steve believes this historic bull market is in its final innings – and we could see explosive gains before it's all over. Catch up on his recent "Melt Up" essays right here:

Welcome to the Next Chapter of the 'Melt Up'

This Is NOT What a 'Melt Up' Top Looks Like

A Dramatic Shift in My 'Melt Up' Thesis