Originally Posted by justin
When PE's are around the level they are now, it doesn't really tell you much. When they dip to 5 and earnings growth going forward will be flat or better, then it is a good time to buy. When PE's go up to 25, 30, 35, the market gets more risky - ie you are paying a decent sized speculative premium.
Unfortunately, the horrible truth is that big market up moves usually happen when PEs are high -- 20+. The PEs are usually high when the earnings fall and stocks crash. Earnings start to improve but the PEs are still high when the market responds with a killer rally.
Rallys when the PEs are high can keep on going because higher earnings keep feeding the fire. When earnings fall off the end comes. It is usually drawn out and painful. Eventually, the PEs fall to much lower levels.