Bill Fleckenstein is not ready to call the top for the market just yet. But pointing to the S&P 500's valuation, he says that once stocks do start to fall, the decline could prove extremely painful.
"The [price-to-earnings ratio] is 16, 17 times earnings," Fleckenstein said on Tuesday's episode of "Futures Now." "Why would you pay 16 times for an S&P company? I don't care about where rates are, because rates are artificially suppressed. Why isn't that worth 11 or 12 times? Just by that analysis, you'd be down by a quarter or 30 percent. So there's a huge amount of downside."
For Fleckenstein, a noted short seller who is famous for making money in the 2008 crash, the Federal Reserve's quantitative easing program has led investors to badly misprice stocks.
The Fed "printing money does not make the economy work, but it sometimes makes stocks go wild," Fleckenstein said. "The reason the stock market did well last year is because the Fed printed $1 trillion."
And as long as the Fed continues its quantitative easing program, and investors continue to have faith in the Fed, "it's not an environment in which you can put together a logical argument to be short and stay short," he said.
Yet if the Fed tapers, the story line could change—particularly if the Fed is forced to increase its QE program after cutting it.
"If they taper, they're going to get a lot of weakness. People are being very macho right now, they think that if the Fed tapers it's going to be OK—and it might be for a little while. But the market's going to end up lower if they keep tapering, and they're going to have to come back the other way. Then at some point, people will see that the Fed is trapped, because what they do doesn't work, and they can't stop," Fleckenstein said.
(Read more: Fed taper will remain slow and steady: CNBC survey)
The investor will be watching Wednesday's Fed statement very closely, then.
"If they don't taper tomorrow, it kind of already shows you that," he said.
(Read more: What the Fed will mean for markets this week)
So while Fleckenstein doesn't want to get short just yet, he adds that "the market could be different going forward."