The problem, as always, is what to do—if anything—in response to what a valuation model suggests; these models may inform us but they predict nothing.
While it is easy to consider the model's information at market extremes (2000 highs and 1982 lows) it is useless in the middle of the curve near the means, since one cannot guess the direction.
An example of this failure is John Hussman (who uses these and other metrics, and who writes a terrific weekly). He is a very bright and conscientious money manager who seems too-smart-by-half with his cavalcade of ever-adjusting market variables (ensembles) that dictate his positions.
Hussman's problem is his endless tinkering and rear-view model-making (which necessarily must always be rear-view)—he often adjusts weekly, looks at transient market action which is often noise, makes individual, temporary stock picks (taking on those particular risks), and uses short positions which can get you killed. This all leads to added expense, that gets passed on to the investor in a higher than needed expense ratio, and fund underperformance partly due to that expense and partly to all his managerial tinkerings.
Perhaps Hussman would be more successful if he just chose one fairly robust metric—like Shiller, whom he admires—and simply scaled the amount of long equity held to given PE 10 points. For example, hold only 25% equity when over PE 24, hold 75% when under PE 12, and 50% during any other time. While this too has problems he would have done better (certainly from the 2009 lows) with this simple, though arbitrary, valuation approach, as it is cost effective and does respect valuations, as he does.
Good post, MV. I think you sum it up well. I've recently gone to around 50% cash for various reasons in order to meet my comfort level given current conditions. However, by doing that I have traded in a good business earning a satisfactory rate of return in exchange for cash yielding next to nothing with the hopes of having a buying opportunity down the road. There is a cost for having the optionality of cash.
uuuzzzzz may want to wait for a deeper correction. IMF floating idea of 10% tax on savings to reduce debts. Anyone think Oblama and Yellen want some redistribution. The berkie puppettzzz boast of the great one bernank but they won;t like a 10% wealth tax. the US puppett press did not report on this. it was a french newspaper.