Market psychology in October is never very good, based on what have been some pretty lousy performances in 1987 and much earlier during the Great Depression. Combine that history with the fact that markets rarely do well in the middle of earnings season, and a continuation to the downside short-term could present an excellent opportunity for investors.

The markets are jittery right now due to inflationary fears, which I think are very warranted. There is little doubt in my mind that Fed Funds rates will be at 4.25% by year-end. As far as 2006 goes, it all depends who succeeds Alan Greenspan. If an inflation hawk steps in, rates could very well go even higher if commodity prices keep rising and the government continues its insane spending.

Despite that somewhat gloomy backdrop, corporate earnings have held up okay, and estimates right now are for the S&P 500 companies to earn $85 in 2006. While that number is by no means assured given the current economic environment, the P/E on such estimates right now is only 14x.

If the recent slide continues, and we get the S&P 500 back down to its support level in the 1135-1150 area, all of the sudden the forward multiple is 13.5 times earnings. A lot of good things could happen if we see that kind of valuation (not seen in years) combined with a technical support level holding and a seasonally strong period (November through April) set to begin after we get through third quarter earnings reports. Continued weakness in crude oil prices would only help that scenario.