Entering 2011, investors were living it up and enjoying the good life. Stocks were rallying and analysts were predicting 1,400-1,500 on the S&P 500. Such expectations are in the rear view mirror following the latest sell-off that came on the heels of the recent relief rally. Anything is possible but such a finish would be fortuitous at best. The markets are behaving, finally, at a level that is commensurate with the global economy. With markets nearing bearish territory, investors arent stepping in to buy the latest dip, yet.

The Federal Reserve confirmed an interesting pattern that has been observed over several recoveries: Our economy hasnt recovered at the pace of recessions prior to 1980. Following the first nine recessions in the U.S. post-war era, growth averaged 7%. In stark contrast, recoveries since 1980 have been much more moderate with an average of only 2.3%. During his Operation Twist introduction on Wednesday, Fed Chairman Ben Bernanke conceded that the U.S. economy would likely operate at below-trend rates for several years thus sparking a global sell-off. However, there is hard data that suggests below-trend doesnt automatically signal another recession. Metrics such as loose money policy, jobless claims and industrial production suggest the recovery can continue. Conversely, consumers are racking up credit card debt and disposable income is shrinking. Revolving debt has increased more than 60% compared to same quarter 2010. If our dysfunctional government fails to stretch tax breaks, consumer spending will face additional pressure and increase the probability of another recession.

Thursdays market collapse intraday trading saw declines of more than 500 points on the Dow Jones Industrial Average came on increased concerns of another recession while some strongly suggest we are already there. Finishing down more than 390 points, we are dangerously close to bearish territory which is typically viewed as a 20% decline from a markets most recent peak. The S&P 500 peaked on April 29 at 1363; a 20% decline would be reached at 1088. Pundits are pressuring investors to buy the dips. Consequently, if you subscribe to the contrarian theory, now is your chance to snap up some bargains. On the other hand, bear markets have been quite painful in the U.S. The average peak-to-trough decline during the past five bear markets has been 36% which means we could see more selling ahead. Furthermore, bear markets tend to be lengthy with an average duration of 556 days and have a high correlation with economic recessions. While the U.S. economy has been growing since 2Q 2009, recent rates havent been appealing (on average 0.7% for the past two quarters) and could see further downward revisions. In this capricious market environment, which may have further to go, buying the dips may be better described as catching a falling knife. Financially strong companies with low debt and strong dividends might be your best bet in this fickle market.

S&P 500 earnings forecasts for 2011 from continuing operations is $96.75 and 2012 forecasts are coming in around $105. After this weeks sell-off and assuming earnings remain reasonably intact, domestic stocks appear attractively valued at 11.9-times the 2011 outlook. The multiple for 2012 is even better at 10.9-times. Since 1936, the S&P 500 average P/E is around 16. Consequently, investors have good reason to think now is a good time to buy, at least from a perspective of fundamentals. On a relative basis, stocks are cheap. But, analysts can be reluctant to adjust earnings estimates at inflection points in economic growth. I believe that estimates for the next two years may be too high unless economic data quickly reverses and shows reasonable improvement. Otherwise, stocks will have a tough time finding their footing and moving sustainably higher. The more likely scenario; stocks are going to get cheaper.

Looking for opportunity outside of the U.S. 2012 P/E multiples for major global indices are as low as I have seen them for several years. China and India have seen significant declines and appear attractive at current levels. In 2009, China and India and other emerging markets were boasting P/Es in the 20-30 range. Now, the Shanghai Composite at just 9-times the consensus earnings forecast for 2012 is worth considering. Comparing foreign to domestic, U.S. markets are looking relatively expensive, with forward P/Es of about 11 and a dividend yield of about 2.5%. Many of Europes blue-chip stocks are now trading at less than 7-times the 2012 earnings consensus with a dividend yield approaching 6%.

Putting it in perspective, investors repudiated the latest efforts of the Fed with a wave of selling on 9/21/11 followed by intense risk off trading on Thursday. Since 2009, Washington has tried to fix the ailing economy with its many stimulus programs. Those are now tightly woven into the wreckage of a still broken economy. A few months ago, Bernanke assured listeners that this was transitory. On Wednesday, we didnt hear the vogue word. Rather, it was replaced with significant and strains in the global economy. Investors have finally concluded; we cant print our way out of this misfortune without creating collateral damage. Now, two and half years later, investors have awakened to a sobering fact; the Feds toolbox is growing empty.

This week, traders will be watching the 1101 area on the S&P 500, which was the intraday low in August and a level that could determine whether stocks hold on or reach for the next leg down. We are reaching the final days of the quarter, which usually produces more selling than buying. Following the latest sell-off, Fridays action was more benign with two winners for every loser, so dont count out the possibility of another relief rally by mid next week. Challenging such a rally will be news regarding corporate profit misses. Ultimately, our two biggest obstacles are Washington and Europe. Assuming resolution on both fronts, we have a redoubtable buying opportunity at current levels. Dont forget what assuming does. Regardless of the mantra that stocks are cheap and ready to head higher, there is nothing in front of this market to give it a much needed lift. We can only hope that economic data will improve but dont count on it for the next few months at a minimum.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This information does not constitute a recommendation of any kind. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services.