Economist John Hussman says the S&P 500 remains about 40 percent above historical norms on the basis of normalized earnings.

"Think of it this way," Hussman writes in a note to investors. "Suppose your poodle is 40 percent overweight. Someone sells you a scale where every pound shown on the dial represents 1.4 pounds of actual weight."

When your poodle steps on that scale, the dial will report that your dog’s weight is ideal.

"That may be comforting if you don't like to face reality, but the truth is, you've still got one sick puppy," Hussman says.

Virtually every assessment that "stocks are cheap" is based on the ratio of the S&P 500 to year-ahead operating earnings estimates, and often comes with a comparison of the resulting "earnings yield" with the depressed 10-year Treasury yield, Hussman explains.

“What's fascinating about this is that this is the same basis on which analysts deemed stocks to be about 40 percent undervalued just prior to the 2007 top, following which the market plunged by more than half.”

The S&P 500 recently traded at about 1,068.

Hussman also warns about earnings estimates. He says current estimates for the S&P 500 include profit margins that are almost 50 percent greater than historical averages.

“Investors will walk themselves over a cliff if they price stocks as if profit margins, going forward, will be dramatically and sustainably higher than U.S. companies achieved in all of market history,” he says.

Hussman says he continues to observe “pointed recession risks,” and thinks that the market is a “rent, not own” market being driven by technical traders “who uniformly and somewhat predictably pile on to the sell side or the buy side when particular levels are hit.”

MarketWatch reports that the BofA Merrill Lynch Survey of Fund Managers for July found that investors have turned bearish in their outlook for the global economy and corporate earnings.

The survey shows a net 12 percent of respondents predicting the global economy will deteriorate in the coming 12 months, the first negative forecast since February 2009 — a big turnaround from June when a net 24 percent forecast the economy to strengthen.