The metric used to calculate market overvaluation is interesting but it has little value for predicting a stock market crash.
Let's take he last 3 major US crashes:
1987: this crash was caused by automated trading systems which could run wild in the absence of any prevention regulations such as circuit breakers
2000: the collapse of the dotcom bubble
2008: start of the financial crisis caused mainly by opaque credit default swaps and packaged subprime loans
Of those 3, only the dotcom bubble seems to be a bit related to the market overvaluation metric. And even right before the dotcom bubble crash there were plenty of economic guru's who argued that classic overvaluation metrics were not valid anymore because we were now in a 'new economy'.
The other two crashes were caused by black swans; occurrences that nobody was aware of and that were only understood afterwards. Most likely the next crash will be a black swan as well.
1987: this crash was caused by automated trading systems which could run wild in the absence of any prevention regulations such as circuit breakers
2000: the collapse of the dotcom bubble
2008: start of the financial crisis caused mainly by opaque credit default swaps and packaged subprime loans
Of those 3, only the dotcom bubble seems to be a bit related to the market overvaluation metric. And even right before the dotcom bubble crash there were plenty of economic guru's who argued that classic overvaluation metrics were not valid anymore because we were now in a 'new economy'.
The other two crashes were caused by black swans; occurrences that nobody was aware of and that were only understood afterwards. Most likely the next crash will be a black swan as well.