On Timing the Stock Market: 

Timing the market – i.e., buying in and selling off according to what you think will happen in the future – is difficult. But if you like the idea, I know of two ways that have, at least, some logical justification.

The first is using P/E (price-to-earnings) ratios. I used to do this, and still do when buying individual stocks. I feel comfortable buying a company when its stock price is at or below 18 times earnings. But this isn’t always reliable. In 2009, for example, in the panic of the mortgage finance crisis, stock prices plummeted and the P/E ratio of the S&P 500 soared over 100. I saw that as an anomaly and didn’t sell, which I’m happy about since prices rose for the next 11 years.

Warren Buffett uses another indicator: Market Cap/GDP, which compares the overall stock market value to the GDP (gross domestic product). Historically, this ratio has been around 80% – or 8 units of stock market capitalization to 10 units of GDP. The rule is to expect a sell-off when the ratio goes above 120%. But in 1999, the ratio hit a high of 140%., and since then, it’s climbed even higher.