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"...but doesn't that mean that the previous dot com bubble could have inflated this figure before crashing down? In addition, doesn't this process put too much emphasis on tracking historical graphs?

Intelligent observations.

The dot com and housing bubbles pushed the S&P beyond intrinsic value on the high side. Now, investors may push the S&P beyond intrinsic value on the low side. We won't know the answer for many years.

From my perch, the lesson of the chart that accompanied my Real Money article (excluded from above because I do not know how to copy-and-paste into a TMB discussion board) is how the S&P moves through these long but unmistable repetitive periods of enthusiasm and despair.

With the dot com and housing bubbles, that was enthusiasm. Now, we may be in despair.

The analogy I use is that the market ebbs and flows, just like the tide. This analogy is apt; 60% or so of a adult male's body is made up of water, and 95% of our brains are water. We may have climbed out of the primordial soup a billion years ago, but we still have water in our ears, it would seem.

Do you know if you bought the S&P in Sept. 1906 that 48 years later, in Sept. 1954 it was still at 250 (with lots of ups and downs along the way.) Even with reinvested dividends, imagine waiting 48 years before making a capital gains (pre-inflation).

As for putting too much weight on history, well, this is the benefit of using rolling 10-year averages. If you bought the S&P a few years ago the financials would have contributed an abnormal amount to the numerator Earnings. Now, the financials will under-contribute to the S&P, given their parlous state. By averaging earnings over 10 years (a Ben Graham idea), the highs and lows get smoothed out.

"...from my short educational period, i learned that fundamentals are more important than technicals."

I am not a technician, but the technical action on the S&P has been poor for many months. One simple approach is to compare the current level of the S&P to its 40-week moving average. If the S&P is in a bull market, it should trade higher than the 40-week average; if in a bear market, less than the 40-week.

Last Friday the S&P closed at 969. Its 40-week M.A. is 1273. So on a technical basis, the market is weak (and has been since Dec. 2007)

So basically does that mean that "this time might be different"?

Do you mean, Does this mean the S&P won't drop below the average PE...that we won't overshoot on the downside? I think we will. This is the lesson of 130 years of stock market history. But today, Nov. 6, 2008, I also own lots of good-to-okay companies selling at great prices.

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