We divide stock market cycles into 3 phases, first-leg bull market, mid-cycle expansion, and bear phase.

First leg: U will sees earnings rebound faster than price and thus P/E compresses, as investors disbelieve earnings durability.

The second phase, or mid-cycle expansion, is when economic and earnings growth moderates but solidifies, thus investors are willing to pay more for perceived sustainability, thus P/E bottoms out and expands. The mid-cycle phase ends when earnings growth accelerates but tops out, and I doubt we are anyway near there at all.

So we are still  not near to  bear phrase......

The main reason driving short term weakness, we believe, is that QE2 is coming to an end this June. Most market participants are firmly of the view that QE2 is responsible for the renewed burst in economic recovery, on that view, we only agree to a very limited extent. Off the bat, we acknowledge it has done wonders for “animal spirits”, bonds were sold in favour of risk assets, causing yields to rise (i.e. higher interest rates, but how can that be good for the economy at this stage? yet US growth in 4q10 was robust). On actual fact, QE2’s influence on real activity was greatly exaggerated, as the money printed was not loaned out for economic activity, but is still sitting in the banks as evidenced by excess reserves

not loaned out for economic activity, but is still sitting in the banks as evidenced by excess

reservesmain reason driving short term weakness, we believe, is that QE2 is coming to an. Most market participants are firmly of the view that QE2 is responsible forvery limited