Equity markets are currently a wild roller coaster ride. With volatility remaining high most days bring gut wrenching up or downs. No-one knows what is going to happen tomorrow or even next year, though that’s the one question that keeps being asked. I never was a boy scout, but I am a big believer in their motto of being prepared.

Many market participants suffer from the need to do something, to buy or sell. They may achieve better results if they stopped doing and started planning. One way to beat an index is timing one wave correctly. As the equity markets are like an ocean there is never a shortage of new waves to get in tune with. Rather than guessing when to start paddling to ride the wave, get in tune with the waves then watch and react at the right time.

That’s enough of the nebulous phrases, let’s dive in to see how to put it in to practice.

“During severe recessions the PE ratio of the market often drops below 10. The forward PE is 19 right now based on expected reported earnings. I’m not saying it will happen but in a severe bear market the S&P500 could go far under 600. That may sound incredible but it’s certainly not impossible using history as a guide.” Thomas Nogales

Following on from yesterday’s How Low Can We Go, I thought it would be good to look at the S&P earnings data. The S&P data shows TTM reported earnings have been falling for a year after peaking in Q2 2007 at $84.95. Earnings are down 29% to $60.39 as of Q1 2008. As if that is not bad enough, estimates for Q2 08 predict earnings hitting a low of $51.68 before improving slightly in Q3 and improving thereafter.
A rosier view is gained by concentrating on the quarterly earnings rather than …