John Hussman, manager of Hussman Strategy Growth Fund (HSGFX) has a price to peak 10 year average earnings as a long term stock market valuation metric.
Compared with the normal one year price to earning ratio, Price to Peak Earnings would eliminate short term noise. He proposes to "buy when Price to Peak Earnings is lower than 15 and sell when it exceeds 19.5"
We have been tracking this index and present the current status. This will be reported every other week (bi-weekly).
On Dec 31, 2010, the ratio of Real Price to the average of the last 10 years' Peak Real Earnings (14.1) to its long term average (11.93) is 1.18. This index points to the US stock market being over valued.
While we have enjoyed strong gains in the US market -- perhaps buoyed by QEII, there are continuing concerns about a correction and having assets in multiple major asset classes remains critical.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.