For some time now, I have been warning of a steep stock market correction. At times, even I felt like I was a stopped clock with the warnings.
But I knew it was only a matter of time before the massive run-up in the U.S. equity markets from the March 2009 crash low would have to take a breather.
I also knew that a lot of gains would be given back, quickly.
The last couple of weeks have already seen the Dow give up all of its gains for 2014. And more declines are coming.
Before I tell you more, let me be perfectly clear: The decline that is now starting in the main U.S. indices is merely a correction, and nothing more.
The long-term bull market in stocks is still in play, and the Dow will explode higher to over 31,000 once this correction is over.
So don’t panic. Don’t let the Dow’s recent decline or further declines bother you. Don’t go to the sidelines. If you have holdings that have large gains, or positions you cannot exit, for whatever reason, consider hedging. I’ll tell you more about that in a minute.
|The Dow will explode higher to over 31,000 once this correction is over.|
At the same time, don’t be afraid to scoop up highly rated stocks during declines. There are already new bargains popping up.
That said, let me tell you the chief reasons equities are now declining and how low I think the Dow could go.
First, as I noted previously, a correction was way overdue … Simply based upon technical conditions.
Second, from a fundamental point of view, we are witnessing a severe, but temporary wave of deflation.
You can see it in commodities, where the prices of everything from the grain markets, to gold, to oil are sliding.
You can see it in Europe, where the Continent is literally in a depression.
You can see it in the soaring value of the U.S. dollar, which is good news for us in the sense that our dollars buy us more, but deflationary for corporate profits.
And naturally, you can see it in the U.S. equity markets, which are now reflecting that deflation.
Third, is the initial impact of rising geopolitical discontent around the globe. Long term, it’s a bullish force for the U.S. equity markets. But short term, investors around the world are alarmed. They’re in a “risk-off” mode. And they’re moving to the sidelines, which by default, is positive for the dollar, threatening to make deflation even worse.
All of this, mind you, will reverse in the months ahead. Worsening domestic and international politics will become a bullish force. As the dollar moves even higher, the Fed will get concerned and become more active attempting to once again devalue the greenback. And investors will move back to a “risk-on” position.
Right now, my models tell me that the Dow could slump to as low as 14,500 over the coming months. The S&P 500 Index, as low as 1,700. That means there’s roughly as much as an additional 12 percent or so of downside out there.
It’s not the end of the world. Keep that in mind. It’s not the end of the long-term bull market in stocks. Not by a long shot.
It’s merely a healthy correction, one that will actually serve to re-energize the markets by forcing die-hard bulls to sell, thereby giving the market new buyers once the correction plays itself out.
My suggestion: If you have equity positions you cannot or do not want to exit, for whatever reason, consider hedging those positions via an inverse ETF such as:
The ProShares Short S&P 500 (SH)
The two times leveraged ProShares UltraShort S&P 500 (SDS)
The ProShares Short Russell 2000 (RWM)
For small caps, the Direxion Daily Small Cap Bear 3X Shares (TZA).
For tech stocks, the ProShares UltraShort QQQ (QID).
And for the precious metals, while a bounce is in the works short-term, it may not last long, making it difficult to profit from unless you’re a very active investor. With more downside coming for gold and silver, I repeat my previous suggestions of purchasing inverse ETFs to hedge any precious metals or mining shares you don’t want to, or can’t exit, for whatever reason.
ProShares UltraShort Gold (GLL) or PowerShares DB Gold Double Short ETN (DZZ) for gold.
ProShares UltraShort Silver (ZSL) for silver.
Direxion Daily Gold Miners Bear 3X ETF (DUST) for mining shares.