5 Signs the Market Is Topping Out

Source: Thinkstock

Source: Thinkstock

With the stock market at all time highs, investor are relatively optimistic that its ascent will continue. The S&P 500 sits just below 1,900 and the Dow Jones Industrial Average is just below 17,000, and analysts are throwing out targets of 2,000 for the S&P 500 and even 20,000 for the Dow. It seems that investors have forgotten that just five short years ago the S&P 500 was trading at 700 while analysts were calling for a 400 price target.

With sentiment having turned so positive after being so negative, I think it is time for investors to start looking for selling opportunities in many stocks. That isn’t to say you should sell all of your stocks today and sit in cash, but you should locate the companies in your portfolio that are trading at lofty valuations, and whose futures analysts are overly optimistic about. There are five reasons for this.

1. Stocks are trading with historically high price-to-earnings multiples

Over the past several decades, stocks have traded within a very wide range of price to earnings multiples. They have exceeded 40 at one point during the peak of the tech bubble, and yet stocks have traded at 6 times earnings back in 1948. Right now, stocks trade at about 22 times trailing earnings, and with slowing growth rates for corporate profits, the forward P/E ratio isn’t much lower. Could they trade up to 40-times earnings? It is certainly possible. However, historically, it has been a good idea to sell stocks when their price-to-earnings multiple exceeds 20 and to buy them when their price-to-earnings multiple is less than 10.