If you don't realize yet, stock valuations are the highest they've been since the dot-com bubble. Using the Shiller P/E Ratio, a more realistic measurement based on the average price-to-earnings ratio of S&P 500 stocks, the PE is close to 40 now. As you can see below throughout the history of over a century, it is higher than Black Monday in 1987 and Black Tuesday in 1929.
Of course, higher valuation does not mean the market must crash soon. Nevertheless, this is just one warning signal that we could be due for a fall in stocks. Or let's put that way: we can safely say that every major market crash will start with an overly priced valuation. Sooner or later, the market will find its means to revere to. Whether the next bear market comes in two weeks or two years, it'll be wise and essential to be prepared! 
Below I'm sharing a good writeup my friend sent me, which presents a good picture how the market Melt-Up is formed, and inevitably followed by a Melt-Down.
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- During June, retail investors put the most money to work in stocks since 2014.
- At the same time, institutional investors are building cash positions.
- This is another signal we could be entering the last stages of the "Melt Up."
The stock market "Melt Down" may be drawing closer...
It feels like the S&P 500 Index is going up every day. Since making a new closing high back in mid-June, it has added another 2.3% on a total return basis (dividends included). That would be a great return for a single month, let alone two weeks.
Yet, considering the 96.1% increase for the index since the bottom on March 23, 2020, it's making institutional investors nervous. So they're raising high levels of cash.
But all of this money isn't participating in the current rally. It's likely all this cash will be forced to seek returns.
That tells us we could be entering the late-stage Melt Up rally, where investor behavior becomes irrational before the consequent "Melt Down"...
UBS's Equity Derivatives team recently noted that institutional investors have added to their cash positions. The team said this has been taking place for the better part of this year. And the amount is significant. According to the firm, the total cash cushion has swelled to roughly $400 billion.
Money markets are telling a similar story. Since the beginning of this year, those assets have jumped from $4.3 trillion to more than $4.5 trillion. That's after a drop of $500 billion over the prior six months. And at the same time, the Federal Reserve's reverse repurchase facility has swelled to nearly $1 trillion.
Typically, institutions look for a 3% to 5% pullback before putting money to work. But if one doesn't materialize, they start to get antsy. Inevitably, that leads to that cash pile slowly trickling out into the market at first. But before long, as others notice a pullback is or isn't materializing, the investing turns into a flood.
At the same time, retail investors continued to pile into the market last month. As they keep pushing the markets to new gains, it makes it even harder for portfolio managers – who are paid based on performance – to sit out the run.
According to data from market research firm VandaTrack, individual investors plowed $28 billion into stocks in June. That was the largest single-month inflow into stocks for the retail investor crowd since 2014, based on VandaTrack's data.
Those weren't the only data showing retail investor bullishness. A separate report from Sundial Research said that 70% of individual investors see stocks rising over the next quarter, according to the Wall Street Journal. That's compared to just 44% of investment "professionals," the WSJ said.
This bullishness has pulled millions of retail investors into the market. Free trading service Robinhood has seen its users surge to 18 million at the end of March 2021 (up from 12.5 million a year earlier).
And Fidelity added 4.1 million new accounts in the first quarter, according to a report from CNBC. That's a 160% jump in new accounts added from the same quarter in 2020. About 40% of these accounts (1.6 million) are for individuals under the age of 35, representing a 222% jump, CNBC said.
After all that, U.S. households now hold the highest percentage of their wealth in stocks. It was reported that, as of April, 41% of households' financial assets were allocated to stocks. Again, that's higher than the dot-com peak of 37%.
As we've noted in recent weeks, retail investor bullishness usually signals that the end of the "Melt Up" is near. It is often the case that this is the crowd that we tend to see near the peak of a Melt Up. It's the last group to arrive to the party. That's also why the final inning of the Melt Up can lead to some of the biggest gains of the entire bull market.
This would align with the "Greater Fool Theory." That's where a feeding frenzy starts, driving investors into stocks until there's no one left to buy.
In the near term, this should point to steady support for the S&P 500, Nasdaq Composite, and Russell 2000 indexes, in addition to the Dow Jones Industrial Average. If these big money investors are waiting for a pullback, it usually means it will be short-lived. And it implies continued gains over the summer.
That means there's no time like the present to make sure you have a game plan for adversity. Because if we're in the last stage of the Melt Up, it would point to another rally in the markets. And if it's followed by a similar type of sell-off, the time to prepare is when the market in rally mode... not when it's dropping.
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