"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.