Doug Short (
link) has a valuable post on the cyclically adjusted price-earnings (CAPE) of $SPX. Using smoothed earnings (average of the past 10 years) and smoothed price (average over the past month), $SPX is valued at 22 times versus a long term average of 16.4. This is in the top 85th percentile of all periods since 1871. In other words, its overvalued on this methodology. See the charts below the break.
The purpose of using 10 years of earnings is to reduce the volatility of a trailing PE due to the cyclicality of earnings. Because of this, however, over- and under-valued can persist for years. So, this is back pocket material and not useful for timing except, perhaps, at enormous extremes.
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