This Day On The Street
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Stocks Are Doomed. Buy More Stocks.

And neither do retail investors.

Sentiment surveys like the one put out by the American Association of Individual Investors still skew on the bearish side right now (even though the AAII survey has become very volatile). And I've only heard a few people mention one of the most important things about those retail investor surveys: They only include investors who like stocks enough to maintain their AAII memberships. The investors who got disenchanted with stocks don't show up in the poll.

So the next time you hear that investors are already in love with stocks, take it with a grain of salt.

>>5 Stocks Poised for Big Breakouts

Myth 2: Stocks Are Too Expensive

With the S&P 500 and the Dow Jones Industrial Average each poking up into new all-time highs this month, it's only natural to wonder how high is too high. But we're far from too high right now.

I mentioned earlier that the big indices have more than doubled since the market bottomed in 2009. But remember that equities were woefully oversold by that point. 2009 isn't the fundamental baseline for stocks; it was a once-in-a-generation discount. And since the market bottomed four years ago, corporate fundamentals have kept pace with soaring stock prices.

Case in point: The price-to-earnings ratio of the S&P 500.

As I write, the S&P's P/E ratio sits right around 15.5. And while that's high compared to the dirt-cheap valuations stocks saw in 2009, that's not a historically high level for stocks. In fact, the S&P's P/E is currently lower than it was in almost all of the 1960s, 1980s, 1990s and 2000s.

The 1970s were the only decade since the index's inception where the average stock's P/E was lower -- and it was a decade where stock prices stagnated. The S&P has gone higher in the past four months than it did in that whole 10-year span.

We're nowhere close to the kinds of P/E ratios you'd expect to see around a market top. Assuming fundamental numbers stayed the same for stocks, the S&P would need to reach 2,852 to reach the premiums seen at the 2007 top -- and 4,469 to reach the tip-top in 2000!
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