thor I like to work on the valuation of a stock or index to decide whether it is overbought.....
to value a stock or index you have to relate it back to the over night interest rate or bond rate (not sure which), say at he moment is 2.5%, then add for the additional risk of holding shares - say 2.5% = 5%........the PEof the stock or index should then be the inverse of 5% which is a PE of 20.0 ....... the PE of the S&P 500 is currently 19.5....... so from that exercise you would deduce the S&P 500 is currently trading at fair value
that's a very rough rule of thumb method concocted by myself, there is a more involved formula which also uses the return on equity - but the broad principle is the same....
