The year 2000 set in motion a gradual erosion of the S&P500 P/E ratio.  I envision it continuing until capitulation sets in, and P/E ratios are sitting in the 7-9 range.

This could take up to 10 more years.

My reasoning is based on the retiring Baby Boomer generation, which is expected to start retiring in 2009.  However, I've noticed several Baby Boomers already starting to retire.

One way to look at Baby Boomers today is "high-wage earners", they're in their elder years and command a higher premium to work because of their experience.  When they retire en masse, my prognostication is, since they aren't making those high-wages, there'll be less consuming going on in the public.

Then, there's various other things:  deficit spending, debt servicing, inflation in materials, overregulation, and higher taxes.

Combating these ideas are the fact the USA is supposedly winning the war on terrorism which would strengthen it's currency, and BRIC (Brazil, Russia, India, China) real growth.

Therein, lies a conundrum - one of these competing sets of ideas will trump the other.

Anyways... back to my P/E erosion idea, I'd like to share some data.

I don't keep a close eye on this data, but I do watch it nonetheless.

=======
REWIND
=======
May 5, 2006 had a significant S&P500 peak of 1325.76

May 2, 2006 S&P500 P/E Ratio was 16.67
May 7, 2006 S&P500 P/E Ratio was 16.63

So, I SWAG (Scientific Wild-Assed Guess) the average P/E ratio at the peak (May 5th, 2006) by averaging the May 2nd & 7th and get 16.65

May 9, 2006 S&P500 P/E Ratio was 16.83 (so even though the index peaked earlier [5th], the P/E ratio peaked later on [9th or so])

May 15, 2006 S&P500 P/E Ratio was 16.33, and with an exception for a few days, it pretty much tanked after here

NOTE:  It took about a 10-day period when the major shift took place

=======
FAST FORWARD FIVE MONTHS
=======
Around Oct 2006, the P/E ratio was once-again nearing these highs, but corporate profits kept knocking the P/E ratio downward, so I kept watching it.

=======
PRESENT
=======
May 9, 2007 the S&P500 peaks at 1512.58

May 9, 2007 S&P500 P/E Ratio was 16.75 (over the 16.65, which sets the clock running)

May 15, 2007 S&P500 P/E Ratio is trending downward - sitting at 16.68 today.

=======
FUTURE SWAG
=======
Over the next 4 business days, what I'd like to see, is the P/E going above 16.75 and the index staying below 1512.58, as a signal profits are falling.

If that doesn't happen, I'm going to keep averaging down my 10% market ultrashort position as time goes on, because I think we're getting closer to some downside action (meaning approx. -5% drop).....sometime soon.  Of course, I could be wrong.

- Vooch