It was after midnight on April 15th, 1912 when the unsinkable did the unthinkable. Built and labeled as unsinkable, the Titanic was the most advanced and largest passenger steamship of its time.

Even though the Titanic's crew was aware of the fact that the waters were iceberg-infested, the ship was heading full-steam for a destination it would never reach.

Being aware of danger is one thing; acting prudently for protection is another.

Today, investors find themselves in an environment that is infested with symbolic icebergs. For savvy investors willing to pay attention and heed warnings, this doesn't necessarily translate into a financial shipwreck, while others might soon be reminded of the Titanic when they look at their account balance.

Iceberg cluster #1: Yesterday's leaders are today's laggards

Throughout the financial meltdown financials, real estate, and homebuilders fell harder and faster than broad market indexes a la S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI) and Nasdaq (Nasdaq: ^IXIC). Beginning with the miraculous March revival (more about that in a moment), the broad market rose while financials, real estate, and homebuilders soared.

Those three sectors led the decline and led the subsequent (mock?) recovery. Since it is reasonable to assume that those sectors will continue to lead the market throughout this economic cycle, it behooves investors to watch such leading sectors closely.

The S&P 500 (NYSEArca: SPY - News) recorded a closing high two days ago on November 17th at 1,110. The Financial Select Sector SPDRs (NYSEArca: XLF - News) reached their closing high already on October 14th. XLF has dropped already 6.68% since.

A more pronounced performance slump is visible in the banking sector. The SPDR KBW Regional Bank ETF (NYSEArca: KRE - News) peaked on August 10th and has fallen 11.08% since. What do banks know that we don't?

Iceberg cluster #2: The root problem hasn't been fixed

Falling real estate prices and rising unemployment are the main instigators behind the toxic assets that got banks (NYSEArca: KBE - News) and financial institutions (NYSEArca: VFH - News) into trouble.

Unless property value rise, the root problem remains alive. It seems like the government's efforts thus far have equate to not much more than an unsuccessful cancer treatment - the cancer is still spreading. 

Median sales prices of existing homes declined in 123 out of 153 metropolitan areas. Fixed rate home loans made to people with good credit are sinking into foreclosure. According to an Associated Press report, the prime loan foreclosures accounted for nearly one third of all foreclosed homes last quarter.

No wonder the real estate sector (NYSEArca: IYR - News) peaked already in September and has been struggling ever since.

Iceberg cluster #3: Earnings not as good after all

But what about earnings you may ask. Even though expectations were low to begin with (beating earnings forecasts was likened to an A student asked to achieve only a C), there is no arguing that this quarter's reports were much better than last quarters.

Many view this as a sign that the economy had hit rock-bottom back in March. In fact, 80% of economists now believe that the recession is over (probably the same 80% that didn't see the recession coming in 2007). However, as the chart below shows, earnings per share (EPS) are directly linked to the stock market's performance at best and a lagging indicator at worst.

Alcoa, one of the biggest components of the hottest sector - materials (NYSEArca: XLB - News), surprised investors with a positive third quarter. Year-to-date, however, Alcoa lost $0.75 per share. This compares to a profit of $2.95 per share in 2007. At this point, Alcoa does not even have a P/E ratio, since Alcoa has no 'E' - earnings.

Considering the relationship between stocks and earnings, it would be interesting to know what caused the March bottom.

Throughout February and March, Wall Street was covered by a veil of uncertainty and worry that the country would slip into another depression. Ever since the Great Depression, there've never been as many articles referring to the Great Depression as in March.

It is exactly that kind of pessimism that foreshadows market bottoms of some significance. Such pessimism rids the market of weak stock holders and opens the door for buyers to bid up prices.  That's exactly what the ETF Profit Strategy Newsletter predicted via the March 2nd Trend Change Alert.

Below is a brief excerpt taken from the Trend Change Alert: 'A multi-month rally, the biggest rally since the October 2007 all-time highs, should lift the indexes by some 30-40%. Tuesday's (2-23-09) 4% spike may be an indication of the initial intensity of the rally. Beaten down sectors like financials (NYSEArca: IYG - News), materials (NYSEArca: VAW - News) and consumer discretionaries (NYSEArca: XLY - News) are likely to see the biggest percentage gains over the next few months.' Many of the recommended ETFs gained triple digits in the upcoming months.

This rise in stock prices and consumer sentiment, along with serious cost-cutting by publicly held corporations, shrank corporate losses and even created profits for some corporations. But once again, it was rising stock prices that resulted in better than expected profits, not vice verse.

Iceberg cluster #4: No buyers

It seems like companies have boosted their production. The key question is whether this uptick is merely due to an effort to restock inventories, or actual demand by the consumer. Fortunately for investors, there's an easy way to find out.

If there is real demand by consumers, it will be reflected by shipping and transport companies. Products in demand need to be shipped from the manufacturer to the consumer or wholesaler. A look at the transportation/shipping sector providers, therefore, an easy and logical answer.

UPS shipments fell for the sevenths consecutive quarter. UPS' profits fell 43% year over year due to lower demand for packaged deliveries. Burlington Northern, the biggest component of the Dow Jones Transportation Average, reported that its freight revenue dropped 27% year over year.

This is exactly the opposite of what you'd expect to happen in a new, sound bull market.

Iceberg cluster #5: (Over) valuation

Would you buy the Dow Jones at 10,000? It probably depends on where you see the Dow trade a week, a month, or a year from today. Many investors and Wall Street gurus are advocating to buy the Dow at current levels.

Let me ask you this: Did you buy the Dow (NYSEArca: DIA - News) at 7,000? If you didn't buy the Dow a few months ago at 7,000, why would you buy it today at 10,000? Today's Dow is 50% more expensive than it was seven months ago, yet more people are willing to buy now than in March. Aside from the stock market, there is no other 'salesman' able to sell a product for a 50% premium.

Bait-and switch at its finest

How can the stock market get away with this? The only difference between March 2009 and today is perception. Even though it defies logic, stocks are perceived to be a better deal today than in March.

Imagine what will happen when the perception changes. Once investors start believing that they can buy stocks later at a lower price they will wait, buyers will dry up, and stocks will plummet.

It's no stretch to expect lower prices. Even though prices have come off multi-decade lows, earnings are lower than any other time since the Great Depression. The S&P 500's P/E ratio (stock price divided by annual earnings), based on actual reported earnings reached an all-time high of 143 a few weeks ago (the current P/E based on reported earnings published by Standards and Poor's is 85.55).

Anybody buying the S&P 500 at current prices is paying 138 times as much as reported earnings. In other words, based on this year's earnings, it would take 138 years of profits to repay your investment.

Would you buy a Subway franchise at 138 times its annual profit if you knew that 15 - 20 is the historical average? 15 - 20 is the average P/E ratio over the past 100 years. Anybody buying now will have to be prepared for significantly lower prices.

Some things never change

History teaches us that overvalued markets can't last forever. History also teaches us how far the market will have to drop to reach fair values. The bear markets of the 1930s, 1940s, 1950s, 1970s and 1980s have provided us with a valuation reset template.

Every bear market bottom has seen P/E ratios drop to historically low levels. Investors, however, don't have to rely on P/E ratios alone. Dividend yields, mutual fund cash levels, and the Dow measured in the only true currency - gold provide another window into the future - a nearly fail-proof composite indictor.

The October issue of the ETF Profit Strategy Newsletter plots the historic performance of the stock market against P/E ratios, dividend yields, mutual fund cash reserves, and the Dow measured in gold, along with target levels for the ultimate market bottom. A picture paints a thousand words and those charts speak volumes about the market's future.

Did you know that the Titanic received an iceberg warning less than two hours before an iceberg brushed the ship's starboard side, buckling the hull in several places? An angry communications officer responded: 'Shut up, shut up, I am busy; I am working.' There are plenty of indicators warning investors today. Will you heed the warning and avoid financial shipwreck?