Last week, I told you — in no uncertain terms — that “Every investor should batten down the hatches” …
And that “the stock markets of Europe and the United States are on the edge of a cliff.”
That they will soon “plummet in a short-lived, but very sharp plunge that will scare the dickens out of almost everyone.”
And I further told you to “Be smart. If not already out of U.S. and European equity markets, get out now while you can.”
That sharp plunge is now here. Last week’s swooning Dow, down 317 points on Thursday alone and now off 588 points (as I pen this issue) from the July 17 Dow Industrials record high of 17,151.56 …
It’s proof positive that the market is in trouble. More trouble than most believe. More so than most want to believe.
Moreover, several sell signals have been hit on my short-term models, confirming a bear market intermission is here.
Yes, there will be some upside bounces along the way. But the broad U.S. and European equity markets are now headed lower. Much lower.
I’ll repeat my worst-case targets below. Keep them handy:
|Those same investors who buy the dips turn into panicky sellers, driving the markets still lower.|
The Dow Jones Industrials can plunge to as low as 13,623, a slump of slightly more than 20 percent.
The S&P 500 Index can fall even more, to the 1,510 level, representing more than a 23 percent swoon.
The NASDAQ should hold up a tad better; its worst case down to around the 3,612 level, a 19.2 percent slide.
And Europe, based on the iShares Europe ETF (IEV), is headed for another devastating plunge that will see Europe’s equity markets shed, on average, more than 43 percent.
I suggest you do the smart thing and get out of all equities you own in Europe and the U.S. If you can’t get out, for whatever reason, then hedge via an inverse equity ETF.
The bear market interlude that’s now unfolding is going to confound most analysts and investors. Why? Because …
A) Most investors and analysts have been way too complacent with the stock market.
They saw it going up week after week, they saw corporate earnings improving, they saw unemployment coming down, they saw GDP growing, they saw the Fed’s desire to keep interest rates low — so what possibly could go wrong they thought.
How could stocks fall in such a rosy environment?
So instead of realizing the bear can have its day too, most investors and analysts will buy every dip — only to see the markets fall further and further, until the pain becomes so intense, that those same investors who buy the dips turn into panicky sellers, driving the markets still lower.
B) They will completely miss the real reasons the Western world equity markets will be falling. They will most likely blame it on geo-political turmoil.
But that would be wrong. The geo-political turmoil you are seeing and the ramping up of the war cycles that I have warned you about are long-term bullish forces for the U.S. equity markets. They will ultimately drive the Dow much higher.
And the fact of the matter is this: The U.S. equity market is falling and will fall further simply because it needs to weed out all the complacency that’s been built up in the market …
Thrash the complacent bulls … scare the dickens out of them and turn them into bears.
Then, and only then, will the market get the needed pause to refresh, the needed energy to turn around back to bull mode, and explode higher.
[Editor’s note: When the market does explode higher as Larry predicts, will you be ready? Click here to learn the crucial steps you must take now to capitalize on this once-in-a-lifetime wealth-building opportunity.]
Put another way, it’s simple market dynamics. What goes up, must go down. And what goes down, must go back up. Sounds ridiculous, but that’s how markets work.
Like a pendulum that must swing from one side to another, from one extreme to another. Want the scale to swing to another side? It must first swing to the opposite side! It’s that simple. Pure physics. Call it Newton’s law of action and reaction, but applied to the financial markets.
We’re seeing the same thing now unfold in many other markets.
Take gold for instance. Yes, it’s not acting all that well. But its current weakness is serving to push the pendulum to the bear side — so it can gather the energy needed to swing back to the bull side.
Or consider the grain markets, where as I warned, a big leg down was needed, and beans, corn, and wheat have all crashed. There too, the pendulum is setting up for a swing yet again, but in the opposite direction, back up.
Or consider natural gas prices, which have plummeted more than 87 percent since their February 2003 high. Do you think natural gas prices are going to zero? No, they’re not.
The 87 percent price plunge is what was needed on a long-term basis to swing the natural gas pendulum back to the opposite side, a new long-term bull market. One that, by the way, is soon going to prove to be one of the most profitable investments of all time.
I tell you all this only to help educate you. Markets are never what they seem on the surface. Hidden below them are perfectly logical reasons for their behavior.
You merely have to understand them in a different light. Not the rubbish you hear on Wall Street or the talking heads who are simply that, talking heads spewing rubbish out at you.
How else could the Dow plummet last week on a strong GDP number for the U.S. economy that beat even the most optimistic of expectations?
You can always find a fundamental reason why, but the simple fact of the matter is that the markets follow certain rules of which can be found in so many other areas of the world, including the hard sciences …
Even though the markets are normally portrayed as being in the soft science category, largely social and psychological in character.
So what should you do now? Simple.
Expect U.S. and European stock markets to fall much further, but not in a straight line down.
Expect gold to soon rally back up, along with mining shares. Look for support at the $1,280 level in gold, down to the $1,265 level.
Above all, stay safe, and keep your head on your shoulders.