As an aside, Shiller's preferred price measure for stocks is not the notoriously misleading P/E of forward operating earnings touted by the perma-bull crowd. Shiller prefers an earnings estimate based on the 10-year average of actual net (not forward operating) earnings. This CAPE(Cyclically Adjusted Price to Earnings) ratio has proved a more realistic and useful indicator of relative stock valuations over time and it is noteworthy that by this metric the S&P 500 at 1087 recently measures about 45% over-valued. A 45% discount would take the S&P back to about 600 if prices were to re-couple with economic reality here. At this point, we are watching 850-875 as a downside level of key support. Maybe it could hold there…if not then the November 2008 and March 2009 lows will be back on the radar. As for the Canadian TSX, there is no historical basis to assume that it is not also at significant downside risk here. At 11,500 the TSX is similarly over-valued and heavily levered to a dipping US economy. The key downside test would be 9000 for the TSX and 7500 if panic sets in again.
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The ECRI WLI Gr. stands at -9.8%. With this measure, the economy went into recession every single time since 1967. I'm just waiting for ECRI's official announcement anytime, that recession is unavoidable. Until that there is no any dip, but after that start position my entire portfolio on to take advantage of the downside.
By the way, Danielle , if you read Dave's daily briefing, take a look of his Monday ECRI chart: pretty convincing.