S&P 500 Below 700...

I believe the stock markets are in for a significant retrenchment based on the deflationary trends of weakening home prices, slowing hiring in a weak employment environment, likely restrictions on fiscal spending, consideration of tightening monetary policy, commodity prices that appear to have peaked, and lack of pricing power by retailers as consumers struggle with debt.

With the S&P 500 P/E ratio almost 50% above its historical median of about 16x in this low inflation environment, I believe the stock markets are particularly vulnerable to a pull-back if deflation begins to dominate market movements. The current multiple of 23x could pull back to 10-14x if the scales tip to deflation, and even further if the economy pulls in significantly. This implies the S&P 500 could test the lows set in 2009 of below 700.

If this case were to prove correct, I would expect the Fed to announce another round of quantitative easing, or QE3, which could help place a floor under the markets and stimulate economic growth.

Should the stock markets tumble I expect the yield on the 10-year and 30-year to come down to around 2% and 2.5%, respectively. In this scenario it suggests the place to make money is in treasury bonds as prices rally as investors flood to the safe haven. The treasury yields likely bottom before the stock market, so investors may need to move to cash or other investments once yields reach the low 2% range. The one wild card is the Russian roulette political game with the debt ceiling, but I believe this likely results in more aggressive fiscal cuts (deflationary) than risk to default. Either way, this political game is hastening the day of reckoning, in my opinion.

This scenario is consistent with my sagflation theme of weak economic growth coupled with increasingly volatile prices. The cause is primarily overly aggressive monetary policies that have been more focused on economic growth than price stability for over 20 years. 

These are my opinions and I do not recommend you follow my actions unless you arrive at similar conclusions based on research independent of my own.