stock-market-bubbleStock prices continue to surge, with the Dow and S&P 500 index ending November just a couple points below their all-time highs.  New record highs have been commonplace since April.

Last month alone, the S&P closed at a record high on nine different days. With the market setting a record nearly every other day, it’s prudent to step back and understand whether the move is justified.

So how can you make heads or tails of the recent run-up in stock prices? Is this really a stock market bubble? My advice is to start by looking at valuations – not prices – to understand if stocks are overvalued.

The best barometer of large-cap U.S. stocks is the S&P 500 index.  The index closed Friday’s shortened trading session at 1,805.  Analysts project that the index will produce operating profits of $109 in 2013 and $120 in 2014.

That means that the S&P 500 is trading at 16.5-times 2013 earnings. Looking forward to 2014, the index trades at 15 times EPS. That’s not a dirt-cheap valuation.  But the P/E multiple is well within the historical norm.

How is that possible?  With the S&P 500 up 139% since the bottom during the Great Recession, stocks must be overvalued…

But they are not.  The simple fact is that the rise for stocks has been powered by earnings growth.

The Fed’s easy money policy has certainly made it inexpensive for corporations to borrow money. And the low interest rates have been one of several factors helping corporate profit margins and fueling earnings growth.

Additionally,  Fed Chairman Ben Bernanke’s monetary policies have encouraged investors to take risks by cashing in their savings to buy stocks. Those low interest rates have made stocks the only viable investment option.  And as a result, stock prices have rebounded handsomely since the last crash.

It’s also worth looking at the longer-term performance of stock prices and earnings. Since the year 2000, earnings for the S&P 500 have doubled.  Yet the index has risen just 25%.

While large-cap U.S. stocks appear fairly priced, there are certain sectors that appear overvalued.  Specifically, e-commerce companies such as Amazon.com (NASDAQ: AMZN), social media stocks like Twitter (NASDAQ: TWTR), and cloud-computing stocks including SalesForce.com (NYSE: CRM) are trading at astronomical valuations.

In my recent article titled Making Sense of the 5-Year Bull Market, I warned Wyatt Investment Research readers that  these go-go growth stocks are richly priced. And in The Latest Sign of a Second Internet Stock Bubble, I highlighted the vigor with which investors are snapping up richly priced stocks.

Blue-chip stocks appear to be reasonably priced with decent prospects for profit growth. However, stocks like Amazon trading at 146-times next year’s earnings or Twitter at 35-times sales are ripe for a pullback.

In my investment portfolio, I’m selling shares of high-flying growth stocks.  Subscribers to my real-money $100k Portfolio investment advisory have been profiting with stakes in Netflix (NASDAQ: NFLX) and Tesla (NASDAQ: TSLA). However, last month we took the opportunity to sell some of our shares of Netflix at a 374% profit.

I’m advising my paying customers to take money off the table after reaping big profits from some fast-moving stocks.  I’m harvesting these profits and reinvesting the proceeds in stocks that have been overlooked, out of favor, and may be ripe for a strong performance in 2014.

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