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Here is an eye opening response to your feelings about an over valued market (From Seeking Alpha)

Are Equities In General Or Dividend Stocks In Particular Becoming Expensive?

Sep 24 3:01 PM (Updated on Sep 24 4:06 PM)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.



Dear HDO Members,

I would like to share with you a summary of a report issued on August 31, 2016 by James Paulsen Ph.D from Wells Fargo Capital Management about equity valuations. The key points highlighted in this report are the following:

As the U.S. bull market completes its 90th month making it one of the longest on record and rising by more than 3.2 times or annualizing at about 17% per annum, investors are understandably becoming more and more concerned about valuation risk. Indeed, many traditional valuation benchmarks suggest the stock market has become highly if not richly priced. For example, based on the trailing 12-month earnings per share, the current price-earnings multiple on the S&P 500 Stock Price Index recently rose to 20.4, almost 30% above its post-war average.

Comparing valuations to historical trend lines

Although traditional valuation parameters may be flashing yellow, unconventional trend-line analysis suggest the stock market still looks reasonable if not attractively priced. It is always useful to consider alternative thoughts and non-consensus approaches in assessing important investment questions. To this end, examining the U.S. stock market relative to its historic trends yields several unconventional insights regarding both overall stock market potential and also what investment factors (e.g., growth, value, capitalization, or price momentum) and sectors may lead the rest of this bull market.



Why use historical trendlines? U.S. stocks have oscillated about a stable trend since WWII. To the extent this stable trend remains persistent, it provides another methodology to judge potential risk and reward in the stock market. Relative to trend, U.S. stocks have been extraordinarily cheap three times since 1945:

•Immediately after WWII.
•In the aftermath of the high inflation 1970s.
•After the Great 2008 crisis.

Similarly, stocks appeared richly priced throughout the 1960s and during much of the time between the mid-1990s until the late-2000s.

Today stocks surprisingly appear reasonably-priced or even cheap relative to post-war trend despite being one of the longest and strongest bull markets of the post-war era, as shown in Charts 1 and 2 above, the U.S. stock market is still at worst fairly priced and even cheap relative to its post-war trendline.

Dividend Stocks Cheap relative to Trend line

Based on the historical trend line chart below, dividend stocks appear to be trading at multi-year low valuations:



Not all High Dividend stocks are cheap

While high dividend stocks in general appear to be cheap, some are more expensive than others. This is especially true for Utilities Stocks which seem to be the most expensive dividend stocks:



Therefore the key to successful high-yield investing is to be positioned into high-yield sectors which are still cheap. This is one of the main reasons why the "High Dividend Opportunities" portfolio is underweight utilities stocks which I personally view that they are too expensive when looking at most valuation metrics.

Conclusions

The following are the conclusions of the Wells Capital Management report:

While the S&P 500 currently sells at a fairly high 20 times trailing earnings, it also is about 3% below its post-war trendline average. In both major previous bull market cycles of the post-war era (during the 1950s-1960s and again in the 1980s-1990s), the S&P 500 Index ultimately peaked out at least 50% above trend line.

The Total U.S. Stock Market Index (a much broader index which includes all stocks on the NYSE, AMEX and NASDAQ exchanges) currently trades almost 25% below its post-war trend line making it cheaper than 78% of the time since WWII.

Many portions of the U.S. stock market remain remarkably cheap relative to trend line including large cap value stocks, small cap growth stocks, strong price momentum stocks and even high dividend yield stocks.

Risk-adverse fundamental factors have surprisingly dominated the stock market so far in this bull market. This is a rather odd result after a relatively long and strong bull market probably which reflects the odd "fear-based economic recovery" experienced since the Great 2008 crisis. Consequently, relative to their respective historic trends, current valuations favor over-weighting "risk-on factors". What Wells Capital Management means by this is that stocks which carry more risk are much more undervalued than conservative stocks. This is also true of High Yield stocks.

I have posted a link to download the full report produced by Wells Capital Management on August 31. To download the report, please click here.

The most important thing to note is that the equity markets have just broken out the upside, something which rarely happens. Our plan is to remain fully invested to maximize our profits from this strong up-trend.