As we warned you yesterday, with just a little more weakness the rhetoric was going to become a lot more bearish. The media didn't disappoint, publishing a flurry of "correction" stories today that painted an amazingly grim picture. Stifel's Chad Morganlander says we could see a correction on the order of 5% to 7% in the coming months. Marc Faber believes we'll see a crash like the one we saw in 1987 sometime this year. Merrill Lynch said stocks could lose as much as 15% of their value by this fall. Yikes. Yeah, well, I'll make two points that I've made for you guys before: (1) The media loves to tall splashy, scary stories because that's good for traffic and/or ratings, and (2) crashes rally come when they're as anticipated as one seems to be now. And, thirdly (though not quite as meaningful as points #1 and #2), some of these guys need to put their correction predictions into perspective - a dip of 5% to 7% isn't that big of a deal. Heck, a 15% correction isn't necessarily odd. Anyway, the whole thing - and the high valuation arguments in particular - got me thinking, at what point do stocks cease to be too expensive, and instead are too cheap to pass up? Here's your answer. As of the latest look (assuming Q1's numbers roll in right around expectations), the S&P 500 is priced at a trailing P/E of 16.7, and a forward-looking P/E of 14.7. Personally, I don't think either are that frothy, but that seems to be a minority opinion. So what's the appropriate trailing or projected P/E ratio? That depends, but for me, anything under 15.0 is palatable, and anything under 14.0 is a bargain. Just for the sake of giving you the framework these other pundits didn't offer though, I crunched the numbers for a handful of valuation scenarios. Here's what I got: Now, I'm not saying the S&P 500 is going to roll all the way back to 1550 and we'll be able to scoop stocks up at dirt-cheap prices. A move to 1550 would 15% drop from current levels, and I don't see that happening even if Merrill does. I was just doing the math, and figured I'd go ahead and calculate even the worst-case scenario. My guess is that investors wouldn't let the trailing P/E fall under 15.0 or so, which puts the S&P 500 at a price no lower than 1675-ish. The forward-looking P/E would be 13.5 then.Those figures are both pretty much in-line with long-term, historical P/E levels. More important to our discussion, the pullback needed to get the market to that valuation would be on the order of 8%... more aligned with Stifel's guess, and more aligned with the typical 10% correction. And, bear in mind that the S&P 500 is already off 4% from its early-March high. So, another 5% to 7% would put the S&P 500 right at its typical 10% correction level. Of course, that's a valuation outlook based on current numbers. If the S&P 500 can't dole out that correction sometime this quarter, any correction's floor will sink a little bit in subsequent quarters. Does that downside target of 1675 hold up from a purely technical perspective? Somewhat. Although it wasn't a source of precise support or resistance back in mid-2013, the 1675 area was a contentious level at that time, and it's likely it would become something of a battleground - and a reversal point - again if it gets tested. The 1675 level is also squarely between a key Fibonacci retracement level and the 50% retracement mark of the late-2012-to-March-2014 rally, so I can see that whole 1620-1685 area becoming something of a support zone. The only real problem with that outlook is a big one - there's a convergence of support forming around 1780. It's a combination of the 200-day moving average line (green), and the support line that extends all the way back to March of 2013 (red). Before we can even worry about 1675, the sellers have to take care of business at 1780. With all of that being said, there are still a bunch of people out there who think the market is going to sidestep any major correction and get back in its bullish groove real soon. That's fine. There's just one more bigger picture chart I need to show you. Although I vowed back on October 25th to not assume a major correction is on the way simply because we haven't seen one in a while, the current rally of 66% is now 30 months old, and we've yet to see one correction of 10% or more. It's getting a little scary, not because I think a bear market is approaching, but just because it's so amazingly unlikely that we would have seen a rally that moves this quickly last this long. We'll have to pay the piper sometime. Of course, none of this rally matters in the meantime if the bears can't even get the ball rolling. Did they actually make a dent today? Yeah, but... The daily chart of the S&P 500 below speaks for itself. Not only did we not get a dead-cat bounce following yesterday's drubbing, but the market put some distance between itself and the support level it broke under yesterday. It's the kind of technical move that's scary enough to send any would-be buyers scurrying, making the problem worse for the next few days. From here, it would be real easy to repeat what happened in January, which wasn't awful, but it certainly wasn't pain-free either. There's something else on this chart worth noting - the VIX poked above its upper band line today, suggesting that people are actually getting worried here. We saw a similar poke in early March that went nowhere, but the similar poke we saw in January did go somewhere, and the one in January also coincided with the S&P 500's move under its 50-day moving average line. Point being, so far, what's happening now looks a lot like what was happening in January, and that ended up being a 5.7% correction. The proverbial "but" is, two days of exaggerated selling right in front of a weekend could simply be a setup for a dead-cat bounce come Monday. Honestly though, while we still had a chance this morning at turnings things around following yesterday's plunge, with today's selling on the table it looks like most investors have convinced themselves things are going to get worse before they get better. In other words, we're bears here. I doubt the S&P 500 is going to be able to move back above the key 1840 level anytime soon. Trade and plan accordingly. On that note, I thought John Monroe explained the near-term outlook perfectly in the SmallCap Network Elite Opportunity newsletter today, though he used the NASDAQ Composite rather than the S&P 500 to do it. John writes (and this is just a snippet): ...I've included a daily chart of the NASDAQ, along with some key retracement levels. I know the chart looks a bit of a mess, however, all of these retracement lines mean something. More importantly, that February bottom I've pointed to here actually means more to me than anything else. I don't think I need to repeat myself but I'll say it again, if the NASDAQ can blow through that bottom, clean up probably a lot of stops around that level and hold the bottom end of the area I've circled, I suspect we may get a very nice tradable rally off of that technical event. Believe it or not, I think the worst possible thing that could happen is to actually have the markets trade higher from where they currently are now without taking out that key February bottom first. Why? Because if the NASDAQ bases around current levels and starts moving higher, I think it's only going to build steam for the inevitable resumption of the recent trend to the downside. I could be wrong, however, just like when pullbacks provide a gathering place for a stock to move higher, the same theory can apply in the opposite direction. In other words, let's rotate everyone back into thinking the markets are done moving lower, start moving higher, then catch everyone getting excited and fall apart. The bottom line is... Well, you get the idea. If the sellers can pace themselves, this downtrend could last a while. If instead the market continues to freefall through next week, the market is apt to find a floor at much higher levels than we talked about above. It's all about context and relativity when the trends (up or down) are hot, and the same thing that Monroe is thinking about in his commentary could end up making our downside-target analysis above a moot issue. And for what it's worth, I'd listen to Monroe and his team. He nailed it on the head with a leveraged bearish ETF that's up about 10% since he recommended it to SCN EO subscribers just yesterday. And, he banked a 13% gain in mid-March on the same bearish leveraged ETF, jumping on a swing he saw developing that - frankly - nobody else really saw coming. The Elite Opportunity likes to buy things and keep them for a while, but John Monroe and his team are just about the best there is when it comes to picking off the quick swing trade when the risk/reward scenario is right. If you want that kind of complete, long-term and short-term tool to boost your bottom line, I can't recommend the Elite Opportunity enough. Here's how to get that test drive, or cut and paste this link: https://www.smallcapnetwork.com/?vmpd_ckstr[click_track]=Newsletter&vmpd_ckstr_redirect=/pages/SCNEO/v1/