Stocks now in 'extreme valuation': Bear
"I do think the market here is overvalued, and one of the things I look at when I'm managing money is the fact that price volatility is always so much greater than fundamental volatility," he said. "Earnings only change four times a year. So, I always look to see extreme cases."
The Dow Jones Industrial Average rallied 78.02 points to finish at 15,548.54, climbing above its previous all-time high set on May 22. The S&P 500 also topped its previous record, gaining 8.46 points to close at 1,689.37, and the Nasdaq eked out a gain of 1.28 points to end at 3,611.28.
On CNBC's "Fast Money," Kelly cited a chart of the S&P 500 showing the average price-to-earnings expansion over the past four years, as well as four highlights:
A 10 percent decline, a 15 percent increase, a 20 percent increase and, most recently, a 7½ percent decline on May 22.
"As of today, we're back at that level again," Kelly said. "So, one of my rules is when we get to extremes, which I define as a 2 standard-deviation move, you have to, at the very least, lighten up. I tend to sell, and I'll look for something to short."
(Read more: Amid market highs, a few stocks still a 'buy': Pro)
Kelly invoked the Oracle of Omaha in making his case that stocks were now expensive.
"Warren Buffett's favorite measure, which is market cap – total market cap – to GDP," he said. "Today, it hit an all-time high. The total market cap in the U.S. hit an all-time high."
Earlier, the S&P 500 surpassed $15 trillion in value for the first time in its history.
(Read more: S&P 500 soars past $15 trillion in value)
This, Kelly argued, was a warning sign.
"Its net ratio is now at 118 percent," he said. "The last time it's gone over 100 percent was 1999 and 2007, so these are now in extreme valuation scenarios. We're in a bubble, could go on forever, but you should at least be aware that this is not a cheap market here."
Fellow bear Dan Nathan of RiskReversal.com agreed.
(Read more: Top large-cap 'buy' stocks: Pro)
"There's going to be a dip very soon, people. That's not the dip to buy," he said. "In the last 13 years, we've had two peak-to-trough drawdowns in the S&P of 50 percent.
"It's coming again, people. I don't know from where. It could be from 1,750 or 1,800, but the Fed's pushing on a string. We don't even have 2 percent GDP growth."
Trader disclosure: On July 18, 2013, the following stocks and commodities mentioned or intended to be mentioned on CNBC's "Fast Money" were owned by the "Fast Money" traders: Guy Adami is long C; Guy Adami is long GS; Guy Adami is long INTC; Guy Adami is long MSFT; Guy Adami is long AGU; Guy Adami is long NUE; Guy Adami is long BTU; Guy Adami's wife, Linda Snow, works at Merck; Karen Finerman is long AAPL; Karen Finerman is long BAC; Karen Finerman is long C; Karen Finerman is long JPM; Karen Finerman is long GOOG; Karen Finerman is long M; Karen Finerman is long WLP; Karen Finerman is long MDY PUTS ; Brian Kelly is long YEN; Brian Kelly is short US DOLLAR; Brian Kelly is long SPY puts; Dan Nathan is long BBRY ; Dan Nathan is long FB July/Aug 25 call spread; Dan Nathan is long QCOM Aug 65 calls; Dan Nathan is long VIX Aug 15/20/25 call fly; Dan Nathan is long EBAY July 52.5 calls; Dan Nathan is long TLT July 110 calls.