Current Stock Market Valuation In Perspective

I am sure by now if you read this blog you know I am someting of a perma-bear. This is not because I am unwilling to consider other points of view, or only pay attention only to data that support my position. It is because I see things from the perspective of a 25-40 year cycle in the economy.

In the fall of 2008, unbelievably just over a years ago, the great bull market that started in 1982 and was driven primarily by aggregate demand spurred by baby boom generation consumption, debt driven over-consumption, and pure speculation, finally fell apart.

Look at this ENTIRE chart, not just the "up" parts. Look at it with periods of 15-40 years in mind.

The above picture is from:
http://stockcharts.com/charts/historical/djia1900.html

Please notice that the DJIA is in the process of forming a "head and shoulders" top. Here is a graph to compare it to:

Why does this matter? Because, from: http://web.streetauthority.com/terms/h/headshoulders.asp

"Why it Matters: The Head and Shoulders pattern is a major reversal formation. Typically, it takes at least two to three months to complete -- and sometimes much longer. When a stock breaks below the neckline, there is no longer any support and very rapid declines can occur, often on increasing volume.
A confirmed head and shoulders formation offers an excellent shorting opportunity. On the other hand, it can also provide an early warning sign for those with long positions to sell quickly. Often, traders will mistakenly hold on in "hope" that the stock will bounce back. In many cases, though, they soon find out that hope is one of the most dangerous four letter words in a trader's vocabulary."

Now, there is one more thing for you to consider, P/E ratios. Take a look at this:

Notice how far P/E ratios are from there historical norm.

I really do not think it takes any special insight to read these cues. Anyone can do it. You just have to know what to look at.

Cash, high quality bonds, and if you want to take on lots of risk buy short ETF's like FXP, EEV, DXD, and SDS. Trade at your own risk. You have to know how to trade ETF's to work with them. They can lead to substantial loss of principal if you are wrong or if you don't know when to sell.