The “Buffett Indicator” is flashing red.

In 2001, Warren Buffett came up with what he called in Fortune Magazine 
“probably the best single measure of where [stock] valuations stand at 
any given moment.” Today that barometer has soared to a two-year high, 
signaling that a market retreat could be coming.

What’s happening: Widely known as the “Buffett Indicator,” it measures 
the size of the US stock market against the size of the economy by taking 
the total value of all publicly traded companies (measured using the 
Wilshire 5000 index) and dividing that by the last quarterly estimate 
for gross domestic product.

The resulting ratio is supposed to tell us how fairly priced stocks are 
by providing a simple gauge of whether the market is overvalued or 
undervalued relative to economic output. If the stock market is growing 
a lot faster than the economy, that could be a sign of a bubble.

Buffett’s Berkshire Hathaway says that a reading of 100% is fair, 
if it’s closer to 70% stocks are at a bargain price, and if it’s 
anywhere near the 200% mark, investors are “playing with fire.”

The indicator is currently sitting near a two-year high, at nearly 190%.