As the stock market keeps moving higher, valuations have reached an ominous level that comes appropriately enough on Halloween.
The Shiller CAPE ratio, which compares stock prices to their earnings over a 10-year period, is at 31.43, about where it was when then-Fed Chairman Alan Greenspan gave his widely cited "irrational exuberance" speech in December 1996, according to calculations by Nomura.
The only time valuations were higher was around the time of the stock market crash and beginning of the Great Depression in 1929 and during the dot-com boom in the late 1990s, according to the model formulated by Nobel Prize-winning economist Robert Shiller.
The Shiller valuation level, whose formal name is the Cyclically Adjusted Price-Earnings Ratio, has captured considerable attention lately as the bull market continues. The S&P 500 is up about 15 percent this year at a time when market veterans have been expecting returns to slow.
Using a more conventional measure of valuation, comparing the S&P 500 price to forward 12-month earnings, the market is trading at a 17.9 multiple. That compares with the five-year average of 15.6 and the 10-year average of 14.1, according to FactSet.
"The theory (Shiller) put forward claimed that markets can be driven to irrationally high levels by self-reinforcing beliefs among market participants. We are still far from the peaks in the dot.com boom When will the second horn peak?" Nomura said in a note.
Shiller himself has been reluctant to push the CAPE level, recently telling CNBC that while he believes the U.S. market is expensive, he wouldn't encourage investors to sell aggressively. Instead, he believes they should diversify into global markets, particularly Russia.