When involved in longer term investing we need some tools to measure where we are in the market cycle. Below see the S&P 500 Shiller Price to Earnings Ratio (right axis) plotted with the S&P 500 (left axis).
Another ratio I look at is the S&P 500 Price to Sales Ratio. Sales are the base metric before profit margins come into play. Know where you stand in the ever changing cycle of price to sales. S&P 500 Price to Sales Ratio (right axis) plotted with the S&P 500 (left axis).
When these ratios are low is when you can buy more earnings or revenues for your share of stock. This is usually when everyone is telling you to stay away from the market. On the other hand when these ratios are high is when you know the market is fairly valued or overvalued. Remember these are just tools to be used in conjunction with other metrics. In great bull markets these indicators can tend to show an overvalued market for years, which is what we saw in the late 1990’s.