This measure says stocks are really cheap…maybe

Published Thu, Jan 22 201512:26 PM ESTUpdated Mon, Jan 26 20158:36 AM EST

A valuation measure comparing stocks to bonds shows that the U.S. stock market is extremely cheap ... or that something is seriously out of whack. The spread between the dividend yield on the S & P 500 index and the yield on the 10-year Treasury—historically used to judge stocks' attractiveness relative to interest rates—has actually gone negative, with the yield for the stock market higher than the payout for bonds. As of this writing, the S & P 500 dividend yield currently stands at 1.89 percent (one can capture that through the purchase of the SPDR S & P 500 ETF Trust ), while the 10-year Treasury yield is slightly lower at 1.88 percent. A stock market yielding more than bonds on a dividend basis alone has only happened three times in the last 60 years and historically meant big gains were ahead for equities. But it's more complicated than that, according to strategists. Two of those occasions were in the last seven years. Those occurrences and today's yield skew could be the result of a post-financial crisis world of Federal Reserve -induced, ultralow borrowing rates which in turn, are used by companies to pay for dividends and buy back stock. And many strategists find it hard to believe that after a triple in price, the stock market is still extremely undervalued—as this indicator would suggest. Read More This chart is a ticking time bomb for stocks It does have its believers though. One of them is Jeffrey Saut of Raymond James, who pointed out the anomaly in a note to clients this week. "We think the equity markets are working themselves into a good 'buy spot,'" said the chief investment strategist, who cited in his research note figures from the number-crunching firm Bespoke Investment Group that show the strong historical track record. Bespoke calculated a 33 percent gain, on average, for the S & P 500 one year after the spread goes negative. And the market was positive each time starting six months out from the three previous occasions in 2011, 2008 and 1962. Still, even the analysts at Bespoke, source of the numbers, have their doubts: "One important caveat is the fact that the prior occurrences all came following large declines in the S & P 500, where the index was trading down at extremely oversold levels. In the current period however, the S & P 500's decline has been much less severe, and over the last six months the index is actually up a little over 1 percent. With a smaller initial decline and the index trading at less oversold levels, the likelihood of such a steep rebound is less likely." Read More Is this the start of a gold bull market? Whether one believes the whole market is undervalued or not, the indicator could signal a positive outlook for the individual stocks that yield more than Treasurys. As Bespoke noted, there's more of them than maybe ever, with almost half the members of the S & P 500 sporting a dividend yield higher than the 10-year yield. Some unusual companies that may look suddenly attractive on just a payout basis with a dividend yield at 1.9 percent or greater include Macy's , Amgen and Corning .

Traders on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

A valuation measure comparing stocks to bonds shows that the U.S. stock market is extremely cheap ... or that something is seriously out of whack.