I have a policy that I've always followed when making financial decisions. Find a trend that seems like a sure bet, and take the opposite position to realize a small advantage.
Bubbles are a fantastic opportunity. Whenever I'm at a social gathering involving a group of people who are casual acquaintances, and they talk about investing, I listen carefully for their consensus on "sure things." Many people will discuss the money they've made, the smart deals that have turned out golden. This was the situation in the late 90's, when it seemed everybody knew of some hot dotcom opportunity, and they spoke confidently about how regular patterns of earnings weren't important anymore. That web traffic was the new measure of wealth. Because of this I never invested in Nasdaq, except to buy a handful of put options on Ebay. I kept my pension money invested in an S&P index fund. Each time the S&P rose another 10%, I took 10% of my money and moved it into government bonds. Hence I maintained a steady, but quite unspectacular, positive rate of return through both sides of the dotcom bubble years.
It's the same with real estate. Two years ago everyone you met at a casual social gathering spoke of rising prices. "They're not making any more real estate." They looked at me like I was nuts when I said that if my personal family situation allowed, I would sell my home and rent for a few years, so I could buy a better home and still make a nice profit.
About three months ago I met someone who said he spent all night the night before trading oil futures. A guy just like me, but he was excited to say that he was making as much money trading at night as he was working during the day. "Time to sell oil" I thought.
When the average guy climbs on a financial bandwagon, the smart money gets out. You know a bubble is happening when the people around you start talking about the smart investments they've made, and they are all bets on the the same market trend. How do you know a bubble is bursting? When there are calls for lawsuits, and prosecution of speculators that fleeced the market. That is what is happening now - and panics are a good opportunity too.
So if I had some cash available (which I don't - I have kids in college) I would either buy an S&P index fund, or buy a nice house in a middle-class neighborhood.
At this point, I'm a lot more worried about the Federal Reserve than I am about the stock market. The market may move lower, but when I see the fed taking on $200 billion of mortgage debt by Fannie and Freddie Mae, and $85 billion for AIG I have to wonder. For many years now it has been clear that the U.S. government is in no position to meet its long term entitlements program obligations. Recently the government has been borrowing $12 billion a month to fund the Iraq war. Now it seems it to be taking on $50 or so billion dollars every single day in a futile effort to stabilize markets. And yet at the same time, investors are flocking to three month Treasury bills in what is called a "flight to safety" I think it is significant that investors only feel safe in making very, very short terms bets on the U.S. government.