| I'm not going to try and convince you of anything. I'm only going to share the data with you, and let you decide for yourself. The only thing I'll add is a reality check that will hopefully cut through the market's current mental clutter (fear) and put things in a perspective you may not have considered yet.
Let me start with the bottom line first - stocks are as cheap as they have been in years..... literally.
 On a trailing-twelve-month basis, the operating (non-GAAP) P/E ratio for the S&P 500 now stands at 13.1. Moreover, since their return to profitability in the first quarter of 2009, the S&P 500's stocks have increased earnings from one quarter to the next four straight times now, and Q2-2010 is expected to easily come in as the fifth-straight quarterly improvement. The nearby chart tells the near-term tale, but click here for the long-term view.
So what's the problem? Why has the SPX tumbled 8.7% since June 18th, and more than 16% since April 23rd? In simplest terms, the market doesn't expect there to be a sixth-straight improvement in quarterly earnings. [I'll warn you now though, I'm going to retract and redefine that idea below.]
Why would the earnings spigot be turned off now? Take your pick of reasons.... Greece, unemployment, financial reform (or lack thereof), oil spilling into the Gulf of Mexico, Spain's debt crisis, a rising (or not) yuan, worries of tax hikes, and several other reasons/excuses have been used as selling prompts.
On the surface the logic makes sense - those things are all bad (they cost money or stifle commerce), so by extension they must be bad for the market.
Look below the surface though; start asking questions of degrees and severity.
I won't deny that there are plenty of pitfalls out there right now... potential threats to earnings. On the flipside, the total real threat these pitfalls pose to earnings is dwarfed by the still-growing opportunity built on real demand from consumers and businesses alike. You just don't hear about that growth because it doesn't make for good television. 'Good' television is rooted in scandal, disaster, and misfortune, at the expense of a complete look at the world and what's going on in it. No wonder we so easily jump to bearish conclusions, even when it's not merited.
That's my long way of saying fear and momentum have taken hold of the market again. Traders are selling first and asking questions later, if they ask them at all.
Once the dust settles though, and the world realizes that the Euro zone isn't going to declare bankruptcy, that financial stocks will find a way around tepid reform, and that a rising yuan offers as many pros as cons, then the fear will dissipate; the downward momentum will follow that lead. Then, the market will start to reassess the sudden plunge in valuations, and realize what I mentioned above.... that stocks are a cheap as they have been in years, and are more likely than not to keep hitting those rising earnings targets.
 So, the question you have to ask of yourself and answer honestly is, do you really think corporations are going to start doing worse - turn in lower earnings - beginning in the third quarter?
And I don't mean 'could they?' - I mean do you really have a specific set of legitimate, quantifiable reasons for an expectation of falling earnings? That's fine if you do. Most investors don't, however, citing only a gut feeling when asked. Funny thing though... the media can create a lot of gut feelings, including misguided ones.
Personally, I see the potential numbers behind all the economic problems. I still see bigger upside numbers though, including hitting those rising earnings targets over the next six quarters.
Between now and then, don't let the noise rattle you. Indeed, we may see more downside ahead until we hit a good technical bottom. It's got next to nothing to do with valuations though. Give it time - the proper valuations will materialize eventually.
 And on something of a side note (though related), this ebb and flow between fear and greed is the same pattern we've seen over and over for decades now.
For instance, the bulls were running wild in March, and the bears took the reigns in May. Stocks were a 'must have' last September, and stocks were completely radioactive in January. Even in March of 2008 - well into the recession - equities were in an upswing, only to be countered in June of 2008 by a panic pullback. (Key difference between than and now - earnings were falling and expected to keep falling then.) It's simply a big chess match, spurred by the pundits who chase trends, and propagated by the media looking to sell advertising.
The key to winning the game is just being able to recognize the bigger picture (which most can't), and to understand where you are in that fear/greed cycle. We're in a fear mode now, but a greed-based turn is around the corner.
Helping you get more out of the market,
James Brumley
Editor - Small Cap Network Newsletter | 
