As the bull market began in August 1921, the S&P 500 price-to-earnings ratio was 14. In September 1926, three years before the 1929 peak, the market’s p/e ratio was 10.72, even more subdued than in 1921. By the time that September 1929 arrived, the market’s p/e ratio had jumped to 20.17. At the February high this year, the S&P 500’s p/e ratio was 25.43. By December 1, it was an even higher 36.67. Other market valuation measures are just as extreme.
Extreme optimism is also reflected in a recent survey of market strategists.
A majority of analysts surveyed by CNBC expect [an] 8%-22% upside for the S&P 500 in 2021.
There are other signs of extreme bullish sentiment.
The option markets offer further evidence of intense speculation. The 8-day CBOE equity put/call ratio declined to .40 last Wednesday, the most extreme level of call buying to put buying in over 20 years. The last time the 8-day p/c ratio was lower was July 18, 2000, at the top of the initial rebound in the NASDAQ’s bear market from March 2000 to October 2002. Sentiment measures are just one way to take the market’s temperature. Another, more immediate way to look directly at the wave patterns of investor psychology is reflected in price charts.