There has been an awful lot of discussion lately on the topic of stock market valuations. Yale's Robert Shiller, who won the Nobel Prize in Economics in 2013, has been quite vocal with his view that stocks are extremely overvalued at this time and that investors should be worried.

In addition, billionaire investors like George Soros, Carl Icahn, and last week, Sam Zell have also publicly stated their concerns about the current levels in the stock market. All three are calling for a BIG correction at a minimum and have been preparing their portfolios accordingly.

However, as we have detailed previously, our view is that valuation metrics have to be adjusted for the current environment (i.e. the last 20 years) and that taken within this context, stocks are currently no worse than fairly valued at this stage of the game.

However, it is also important to recognize that after a stellar 5-year bull run, stocks are NOT cheap. A fact that causes some folks to fret and value oriented investors to struggle.

Finally, it is vital to recognize that valuation indicators are utterly useless when it comes to the timing of when bull markets end. Remember, bull markets don't just end because stocks aren't bargains anymore. No, historically bull markets end when the economy falters, the Fed gets aggressive, or an external shock occurs.

The key is to understand that any discussion of value - relating to ANY asset class - is a big-picture issue and best used by those with time-frames of 5-10 years. Remember, as John Maynard Keynes effectively said, markets can appear to stay irrational (something that is always in the eyes of the beholder) longer than someone playing the opposite side of the trade can stay solvent.

So, with the appropriate caveats out of the way, let's see if we can't find some value out there.

So, What's "Cheap" These Days?

On the topic of finding value, every now and again, it is an interesting exercise to look around at the various asset classes in search for areas that might indeed be undervalued or "cheap." To be sure, this is a VERY long-term game and isn't something we practice with client assets. However, understanding what is "cheap" can help one to understand what is happening in the markets from a big-picture standpoint.

We've established that while stocks are not overvalued, they are also not cheap. The chart below is Exhibit A in our argument on the subject.

So, stocks aren't cheap. What about bonds? Well, with interest rates remaining near historical lows it is easy to recognize that bonds are actually very overvalued and likely to enter a secular bear at some point in the future. (However, the timing of this widely anticipated move has been challenging to say the least.)

A review of global stock markets produces a similar valuation perspective to that of stocks in the U.S. - not cheap, but not overvalued either. A weekly chart of the iShares Emerging Markets ETF (NYSE: EEM) over the last 10-11 years makes this point fairly clear.

Next up, let's look at commodities. In this space, one can argue that the commodity index as shown by the PowerShares DB Commodity Index ETF (NYSE: DBC) is certainly at the low end of the range seen over the last few years.

However, from a longer-term perspective, it is impossible to argue that commodities such as gold (NYSE: GLD) or silver (NYSE: SLV) are cheap after a secular bull run lasting more than a decade.

Although the gold-bugs will likely disagree (because the answer to any investment question for this crowd is to "buy more gold"), it appears that the secular bull run in Gold may have ended. But, to be fair, Gold has corrected enough to perhaps warrant a solid trade to the upside. But then again, a break below 115 on a weekly basis would be a problem.

Let's now look at real estate. After the out-and-out crash seen in this market during the credit crisis, it might be easy to fall into the trap of thinking that real estate might be cheap and a good place to invest these days. However, the chart below paints a different picture.

In fact, the IYR - the iShares U.S. Real Estate ETF (NYSE: IYR) shows that prices of REITS are back to levels seen in 2006. Therefore, one could actually argue that real estate is overvalued at current levels. But in any event, it is quite clear that real estate is definitely not cheap here.

So to review, stocks aren't cheap, bonds are overvalued, emerging markets look to be fairly valued, the commodity index and gold/silver could be ripe for an intermediate-term rally, but are NOT cheap from a long-term perspective, and real estate is no longer at bargain-basement levels after a 5-year rally.

But We DID Find Some Value In...

However, in our search for value, we did find one asset class that is TRULY cheap by historical standards. And while some may not agree that volatility is even an investable asset, let alone an asset class, "Vol" does appear to be poised for a big move.

Tomorrow, we will dig into this situation and try to determine if there is an opportunity here.

Turning To This Morning

Geopolitics are back in focus this morning as the ceasefire in Ukraine appears to be in a fragile state, President Obama is planning new military efforts to combat ISIS, and the EU is talking about more sanctions against Russia. In addition, the Eurozone September Sentix Economic Index was disappointing. As such, European markets are lower and it looks like stocks will come off of the new highs set on Friday's close when the opening bell rings on Wall Street. There are no major economic reports scheduled for release here in the U.S.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    - Japan: +0.23%
    - Hong Kong: -0.20%
    - Shanghai: closed
    - London: -1.02%
    - Germany: -0.17%
    - France: -0.35%
    - Italy: -0.41%
    - Spain: -0.64%

Crude Oil Futures: -$0.68 to $92.61

Gold: -$0.70 at $1266.70

Dollar: lower against the yen, higher vs. euro and pound.

10-Year Bond Yield: Currently trading at 2.437%

Stock Indices in U.S. (relative to fair value):
- S&P 500: -3.56
- Dow Jones Industrial Average: -39
- NASDAQ Composite: -6.27

Thought For The Day:

Treasure the love you receive above all. It will survive long after your gold and good health have vanished. - Og Mandino

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Geopolitical 'Issues'
      2. The State of Fed/ECB Policy
      3. The Level of Interest Rates
      4. The Outlook for U.S. Economic Growth

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Neutral
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately Negative
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

• Key Near-Term Support Zone(s) for S&P 500: 1900(ish)
• Key Near-Term Resistance Zone(s): 1960

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

Trend and Breadth Confirmation Indicator (Short-Term): Neutral
Indicator Explained

Price Thrust Indicator: Negative
Indicator Explained

Volume Thrust Indicator: Negative
Indicator Explained

Breadth Thrust Indicator: Neutral
Indicator Explained

Bull/Bear Volume Relationship: Moderately Positive
Indicator Explained

Technical Health of 100 Industry Groups: Neutral
Indicator Explained

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

• S&P 500 Overbought/Oversold Conditions:
        - Short-Term: Moderately Oversold
        - Intermediate-Term: Moderately Oversold
  
• Market Sentiment: Our primary sentiment model is Positive .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.

Weekly State of the Market Model Reading: Neutral
Indicator Explained

Looking For Guidance in the Markets?

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com
President, Heritage Capital Research
Check Out the NEW Website!

Positions in stocks mentioned: none

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Free Research From StateoftheMarkets.com:

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

• State's Chart of the Day - Eeach day we highlight a top rated stock with a positive technical setup
• The Risk Manager Report - Stay in tune with the market's risk/reward environment
• The “10.0” Report - These are the REAL best-of-breed companies
• The Insiders Report - See what the people who know their company's best are buying
• ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.
• The SOTM 100 Portfolio - The top rated stocks in each market sector
• State's Market Models - Each week we quantify the "state of the market" with a series of models
• The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Our Mission Statement:

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.