What is the longest period of time that the S&P 500 has traded without a 10% correction? According to Bespoke Investment Group, the record is a blissful 1,127-day run from July 1984 to August 1987. The current rally? 1,069 days. The waters are so calm, in fact, that only 13.3% of respondents to the most recent Investors Intelligence Sentiment Survey described themselves as “bearish.” The contrarian indicator at 13.3% represents the lowest level of bearishness since February 1987.

Should we connect the dots between Black Monday’s carnage (10/19/1987) and present-day stock market dynamics? That exercise should be left for gloom-n-doomers. You may even want to read commentary by David Tice of the Prudent Bear Fund (BEARX) or watch video involving Marc Faber.

On the other hand, Mark Twain had the right idea when he said, “History never repeats itself, but it often rhymes.” For instance, when adviser bearishness registered dramatic lows in the past, stocks have had a tendency to pull back significantly. Similarly, price corrections of 10% or more tend to take place every 12-18 months; today’s run-up is closing in on a 27-year old record for the longest period without corrective activity. Additionally, the S&P 500 has already broken a record with respect to the number of sessions that the benchmark has traded above its 200-day moving average.

In technical analysis, one presumes that price movement over time matters. And historically speaking, benchmarks like the S&P 500 pull back to their mean (i.e., 200-day moving average) more frequently than once in two calendar years; an index will even spend a number of months below a key average.

The idea that history rhymes is built into the fabric of fundamental stock analysis as well. Right now, trailing (12 months) and cyclically adjusted (10 years) price-to-earnings (P/E), price-to-book (P/B), price-to-cash flow and price-to-dividend all forewarn extreme overvaluation for U.S. equities. Even Warren Buffett’s favorite measure for addressing value in stock assets – total market cap to GDP – resides at 125 percent. That is roughly 15% higher than the overvalued conditions that existed in 2007. The only time that total market cap to GDP was more worrisome in history? At the start of 2000.

Again, I will let others discuss the “inevitable crash” or “imminent collapse.” I find it more practical to address the ways in which one might prepare for a near-term correction of 10.0%-19.9%.

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