In a state of blissful happiness.
Whenever a phrase includes a number, like the whole nine yards, at sixes and sevens etc., then attempts to find its derivation usually focus on the number. 'On cloud nine' is no exception. A commonly heard explanation is that the expression originated as one of the classifications of cloud which were defined by the US Weather Bureau in the 1950s, in which 'Cloud Nine' denotes the fluffy cumulonimbus type that are considered so attractive. Another explanation is that the phrase derives from Buddhism and that Cloud Nine is one of the stages of the progress to enlightenment of a Bodhisattva (one destined to become a Buddha).
Neither of these explanations holds water. To begin with, both the cloud classifications and the Buddhist stages to enlightenment have ten levels. To single out the last but one stage of either is rather like attributing the source of the 'whole nine yards' to American Football, where it is ten yards rather than nine that is a significant measure. Also, the fact that nine is far from the only number that has been linked with clouds, argues against those origins. Early examples of 'cloud' expressions include clouds seven, eight, nine and even thirty-nine.
It seems that it is the clouds themselves, rather than the number of them, that were in the thoughts of those who coined this phrase. The imagery was originally of a 'cloud cuckoo land' or 'head in the clouds' dreaminess, induced by either intoxication or inspiration, rather than the 'idyllic happiness' that we now associate with the phrase. The early references all come from mid 20th century USA and the earliest that I've found is in Albin Pollock's directory of slang, The Underworld Speaks, 1935:
"Cloud eight, befuddled on account of drinking too much liquor."
'Cloud nine' comes a little later, for example, in The Oxnard Press-Courier, August 1946:
"I think he has thought of everything, unless the authorities pull something new on him out of cloud nine."
Around the same period we find clouds seven and thirty-nine, in The San Mateo Times, April 1952 and Ross’s Hustlers, 1956, respectively:
"Mantovani's skilled use of reeds and strings puts this disc way up on Cloud Seven."
"That stuff is way up on Cloud Thirty-nine."
The early favourite was 'cloud seven' and many of the oldest citations use that form, as in this piece from The Dictionary of American Slang, 1960, which was the first printed definition of the term:
"Cloud seven - completely happy, perfectly satisfied; in a euphoric state."
This early preference for seven as the significant number may have been influenced by the existing phrase 'seventh heaven'.
Since the 1980s or so, 'cloud nine' has become predominant. That has probably been influenced by the use of 'cloud nine' in popular music - George Harrison adopted the term as the title of his 1987 album and, more notably, The Temptations' 'psychedelic soul' album of the same name, in 1969.
Linguistic hype being what it is, we now hear people expressing their happiness with the inflationary 'cloud ten', which brings us back to the cumulonimbus/Buddhist theories. Eighth heaven anyone?