There is froth in the market.
Yahoo (YHOO) is frothy, because we don't know yet what its stake in Alibaba is worth. Once that company completes its IPO, then we'll know, and can adjust valuations downward accordingly.
But that's not all. Keurig Green Mountain (GMCR) is frothy. We don't know what its deal with Coca-Cola (KO) is worth, but it sure does not merit a price/earnings PE multiple like that of Google (GOOG). Does it?
It's easy to see stocks that are overpriced, or may be overpriced, in this market. The question is whether the market as a whole is overpriced. Is this 1999? Or is it, perhaps, 1997?
One way to know for sure is to look at sentiment indicators. Right now they're neutral.
Another way is to look at the average PE in the Standard & Poor's index. At 19.7 it's elevated by historic levels, but nowhere near the highs of the last two bull markets, let alone the numbers achieved when earnings were collapsing.
There are sections of the economy that are collapsing, or are in a very depressed state right now. Basic materials are doing poorly. Many are down for the year - the exceptions are in the precious metals.
This is good news. When there are sellers to match the buyers, when there are down sectors to match those rising, that means there's still room to run.
Another place to beware of is retail. Wal-Mart (WMT) is practically flat for the year. Don't ask about J.C. Penney (JCP) and Sears (SHLD). Simon Property (SPG), the largest owner of shopping malls, rolled over last spring and has yet to get up. The fact they just hired a former nursing center executive as CEO of their strip mall and enclosed mall spin-off should tell you everything you need to know. The growth here will come from financial engineering, nothing else.
Banks seem to be doing well, but some of the biggest, like Bank of America (BAC) and Citigroup (C), are still selling for much less than their book value. Even banks that are considered stars, like Prosperity Bank (PB) of Texas (I inherited some shares) are priced at a reasonable 1.54 times book value. No froth here.
The point is that froth exists in any bull market. High growth sectors of the market become speculative when everyone gets optimistic. The average stock rises and falls, but mostly it rises.
Big tech, in fact, has already ended its run leading the market. Google and Amazon.Com (AMZN) are no longer trading at highs. The same with Microsoft (MSFT) and Apple (AAPL). That shows we're no longer at the early stage of this bull-run - we're closer to the middle.
The market, hungry for action, has moved on to smaller names, like Plug Power (PLUG) and Fuel Cell (FCEL). Instead of bidding up pure Internet technology, speculative buyers are going for biotech names like Regeneron (RGEN).
But overall, this is not a frothy market. This is a bull market climbing the proverbial "wall of worry." It's not 1999, it's more like 1997.
Now, in 1997, I launched a newsletter that regularly warned of froth in the Internet market, and called some executives "clueless." That is how speculative sectors roll. If you want to speculate, go ahead. Just keep your finger on the "sell" button and be ready to sacrifice some gains in order to prevent losses. That's what I would be doing with most of the names I have listed - the fuel cell companies, the biotechs, the strange consumer products that claim to be unique but, really, are not. (No, coffee is not unique.)
Investors, meanwhile, should be rotating sectors. If you have a profit in something like Regeneron, cash out and look for something with sold long-term prospects, like Starbucks (SBUX). This may be a good time to hit some Disney (DIS), some Comcast (CMCSA), maybe even IntercontinentalExchange (ICE), which now owns the New York Stock Exchange. American Express (AXP) looks reasonable here.
These companies, and many others, will be riding the bull, but won't be destroyed by the bear like some of the more speculative issues. It is still a good time to invest.
It's when everything seems to be working, and everyone screams buy, that you sell. We are not there yet.
Disclosure: I am long AAPL, AMZN, GOOG, PB, BAC, KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.