'By the time a man realizes that maybe his father was right, he usually has a son who thinks he's wrong' - Musician Charles Wadsworth.

Delayed reactions are often the investor's worst enemy.

By the time the average Joe realized that the 2007 prices were not sustainable, the market had already plummeted 20%, 30%, or more. By the time the average Joe realized that March 9th marked the bottom of the ferocious decline from the October 2007 highs, the S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI), Nasdaq (Nasdaq: ^IXIC), and other indexes had already gained 20%, 30%, or more.

There is no 'better late than never' in investing

The epitome of delay might be the National Bureau of Economic Research (NBER), the organization in charge of declaring the beginning and end of recessions. It took NBER over a year to figure out that we had actually been in a recession.

It wasn't until Friday, November 28th, that the NBER determined a recession had indeed started in December 2007. By that time, the S&P 500 (NYSEArca: SPY - News) had lost 669 points or 43%, the Dow Jones (NYSEArca: DIA - News) was down 5335 points or 38%.

Wall Street and the financial media didn't do much better. Up until September 2008, the market's decline was merely viewed as a correction spurred on by the collapse of Lehman Brothers and the troubled Fannie Mae and Freddie Mac.

In early September 2008, the Volatility Index (VIX), also called the 'fear index' because it measures option traders concerns about lower prices, sat at 21.50. Any reading below 25 indicates that investors are complacent and are not worried about a decline. As you can tell, the VIX is a contrarian indicator; extreme complacency usually precedes a major correction. Right now, the VIX is at 21.35, the lowest level since September 3rd, 2008, so watch out.

Does the fact that the VIX is at its lowest levels since the beginning of the real financial (NYSEArca: XLF - News) meltdown foreshadow dire times ahead?

A history of major recessions

Before we discuss some of the indicators that actually have a record of long-term accuracy, we need to point out that this bear market is much different than any other we've seen in decades. In fact, we haven't seen anything similar in over 80 years.

Those who have relied on indicators with track records of less than 80 years, have found themselves startled by the post-2007 market meltdown and will likely continue to be on the wrong side. It seems that about once every century, a market collapse comes along that defies most normal economic gauges.

In the 18th century, the South Sea Bubble caused financial ruin for many. This bubble burst in 1720.

A serious depression in the late 1830s sent the markets tumbling by some 70% (based on British stock prices). We all know what happened from 1929 - 1932 (the anniversary of Black Monday is coming up later this month).

Those wanting to go back even further, will find that the Tulip mania - where tulips (yes, the flower) contracts sold for more than 10 times the annual income of a skilled craftsman - collapsed in 1637.

Things are different

If you look around, you will see that the investment environment has changed. The freefall from the 2007 highs to the March lows, was deeper than any other since the Great Depression. The rally from the March lows was more powerful than any other rally since the Great Depression.

Additionally, the concept of 'decoupling' was proven wrong on numerous levels. There was no decoupling between emerging markets (NYSEArca: EEM - News) and developed markets (NYSEArca: EFA - News).

There was no decoupling between stocks and commodities, either. There wasn't even a decoupling between defensive and offensive sectors.

Following the bust of the dot.com bubble, four of the nine S&P industry sectors were up even though the Nasdaq (Nasdaq: QQQQ - News) and technology sector (NYSEArca: XLK - News) lost about 40% in 2000. 2008 saw all industry sectors decline. Consumer discretionary (NYSEArca: XLP - News) was the best performing sector with a loss of 15%.

How about oil? Ever since I can remember, high oil prices have been viewed as a downer for stocks and the economy. Crude oil is up more than 150% since its February 2009 low of $33/barrel. Over the same period, stocks have gained over 50%.

CNNMoney.com reports concerning this phenomenon: 'Oil prices were hovering around a low of near $30/barrel back in February. But how good did you feel about the economy back then? Fears about a massive wave of big bank failures and another depression were running rampant. So, cheaper oil and gas were little consolation.'

Contrary to the fears of another depression, the ETF Profit Strategy Newsletter issued a Trend Change Alert on March 2nd. This alert predicted the most powerful rally since October 2007 with a target range of Dow 9,000 - 10,000. ETFs recommended at the time included the Ultra Financial ProShares (NYSEArca: UYG - News), Ultra S&P 500 ProShares (NYSEArca: SSO - News), and many other ETFs which gained 100% or more.

Some things never change

Long before tech geeks starting using their skills to devise high-tech, hypothetical trading models designed to track and predict the market's day-to-day, hour-to-hour, and minute-to-minute swings, there were old-time indicators that graced Wall Street.

Unfortunately, Ivy League type analysts chose to ignore, simple, common sense valuation metrics even the average Joe investor could understand. Perhaps it's the simplicity of those indicators that makes them unattractive to such hyper-educated, overconfident, high-tech analysts.

Unfortunately, the new breed of analysis had a glitch. It wasn't able to predict the 2007 meltdown. It simply didn't show up on the radar.

Like a seasoned, skilled craftsman knows all the tricks of the trade; the old-time indicators know all the ins and outs of the market. As such, they don't just focus on short-term, hypothetical schemes and are not fooled as easily. As it turns out, the simplicity of those old-time indicators proved much more accurate than its 'sophisticated' modern-day counter parts.

Allow me to introduce - the 'Four Horsemen'

Numerous times in the past, the ETF Profit Strategy Newsletter has referred to the 'Four Horsemen,' four simple common sense, easy to understand, yet evergreen indicators. The four horsemen have an outstanding track record in determining the market's long-term direction. They are:

1) P/E ratios

2) dividend yields

3) sentiment measured by mutual fund managers cash reserves

4) the Dow measured in the only true currency - gold (NYSEArca: GLD - News)

A quick glance at historic charts plotting stock prices against indicators 1 - 3, shows that the market has never reached a lasting bottom unless P/E ratios, dividend yields, and mutual fund cash reserves has clocked in at levels indicative of a market bottom.

For example, historically P/E ratios range between 15 - 25. Currently, the P/E ratio based on actual third quarter earnings is 138. It seems like stock are over-valued since much lower P/E ratios are needed for a market bottom to be considered lasting (see chart below).

 

Dividend yields are near all-time lows. Market bottoms see significantly elevated dividend yields. Mutual fund cash reserves are at about the same level they were in late 2007, when the market topped. Market bottoms are associated with highly elevated cash reserves, as even fund managers cave in and sell at the worst time.

The Dow measured in gold has been falling since 1999, and it's fallen harder than the Dow measured in U.S. dollars. Eventually, the dollar-Dow will catch up with the gold-Dow.

Indicative of their implications, we've dubbed those four indicators the four horsemen. Every single one of them points towards significantly lower prices. Their message is unanimous.

The November issue of the ETF Profit Strategy Newsletter plots the historical market bottoms of the last 100 years against the P/E ratios, dividend yields, and cash reserves and the time. Additionally, the newsletter features a range for the ultimate market bottom, based on the indicators' readings associated with each major market bottom.