Source: Http://www.ritzholtz.com

This is a historical chart of the S&P 500’s Price-to-earnings ratio (P/E). For those that don’t know, a P/E ratio tells you how many years of a company’s earnings it will take to buy it outright.

So – if you buy a company for $1,000, and it earns $100 a year, you’re said to have a P/E ratio of 10 ($1,000 / $100).

In other words, it would take you ten years to break even (As a buyer).

Today, the S&P has a P/E of 12.6. But in the early 20’s, 30’s and late 80’s, this ratio dropped to as far as 5.
This can only mean one thing: Stocks have just entered fair value… the market as a whole isn’t even cheap yet!

The reason why is because we’re in a market where both earnings and stock prices are dropping dramatically.

This also means that shorting the S&P 500 as a whole is still a generally safe bet. You can do that by issuing a short-sale on the SPDR S&P 500 ETF (NYSE: SPY).

This from Smart Profits Report:

I’ve been spending the past two weeks intently trying to make sense of the dramatic shifts in our financial markets, the U.S. economy, and even our societal mood.

The news is not good.

In fact, a friend of mine who’s an investment banker summed up the current conditions best, using just one word: “Brutal.”

She reports that her business hasn’t just slowed… it’s at a complete standstill. As a result, she and her colleagues won’t receive any bonus this year.

Meanwhile, the mainstream media continue to rant and rave, almost relishing the situation. A popular radio talk show host is predicting financial Armageddon in the United States, terrorist attacks and pretty much every other type of catastrophe. Frankly, I’m surprised a devastating locust attack wasn’t mentioned.

And I bet that if you talk to people you do business with – from your local shop owner, to gym manager, they’ll tell you that business is off considerably.

Before we dig into the other side of this mess, let me just state for the record that this is a scary time – and things will probably get worse before they get better.

But if you’re one of those folks who are having a difficult time picturing the other side of this mess – a brighter side – you need to realize just how extreme market conditions already are. As the saying goes, “This, too, shall pass” – and the market will eventually return to normal.

Here’s a little perspective – and some common sense…

Perspective Amid The Panic

Take a look at the following facts – ammunition that suggests we’re due for a bull market.

Okay, maybe not today… maybe not next month… maybe not even in the first half of next year. But the numbers below should give investors confidence that it will soon be time to back up the truck and load up on stocks.

#1: Excluding the 1929-1932 crash, bear markets recouped their losses in an average of 22 months.

With the exception of 1929, the largest declines were as follows:

– The 1937 Bear Market: A 50% decline, which lasted 13 months and recovered all its losses in 58 months.

– The 1974 Bear Market: A 43% decline, which lasted 21 months and recovered all its losses in 21 months.

– The 2002 Bear Market: A 45% decline, which lasted 25 months and recovered all its losses in 40 months.

The current bear market is down 52% – from peak to trough – and has lasted for 14 months.

#2: According to Wells Capital Management, between 1984 and 1994, the loan delinquency rate was above today’s level.

In fact, current business loan delinquencies are actually near record lows and consumer loan and credit card delinquencies are at the same level as they were three years ago.

And while delinquencies will rise further as the economy regresses, Wells believes this doesn’t support a depressionary debt collapse.

#3: Volatility is at an all-time high.

During 1929, volatility peaked at 68%, according to Barron’s. In 1987, it peaked at 64%.

The Volatility Index (VIX) recently set an all-time closing high of 80.9 on S&P 500 options expiring in 30 days, which indicates an average daily move of 5%.  That’s an unsustainable amount of volatility and the markets will certainly slow down and become less frenetic.

#4: At the recent lows, the S&P’s annualized 10-year real return was a negative 3.8% – an all-time low. At market lows of 1974, the trailing real 10 year annual loss was 2.7%.

#5: Only 16 stocks in the S&P 500 are positive on the year.

#6: Morningstar tracks over 11,000 equity mutual funds. Every single one is down for the year.

I share these statistics with you, not to show you how dire things are, but to illustrate the excessive fear that investors are experiencing. So what’s the solution?

In Times Of Pain, Go Against The Grain

Market history teaches us that during these kinds of extremes, it’s usually a good time to move in the opposite direction.

I’m not necessarily recommending that you load up on stocks today, because I think we have a little more pain to experience yet.

But with the market so far past its normal limit, I fully expect it to return to a more typical environment. And in order for that to occur, the market must rise significantly.

I believe the next six months will be a once-in-a-generation opportunity to buy assets at irrationally low prices.

Source: The Numbers Don’t Lie… Why A Bull Market Will Arrive Sooner Than You Think