Investors who are late to the game often try to buy-the-dip.
Thinking they see a chance to finally get on board the bull train, they buy into a bear market at the time when they should stay on the sidelines.
You want to avoid this trap. There is a difference between buying the dip and catching a falling knife.
The former strategy works when the bullish sentiment—that is, greed—is still dominating the market. As soon as the bearish sentiment—that is, fear—takes over, the dip becomes a bull trap… a falling knife.
Panic Mode: On
In November, I talked to you about the end of the longest bull run in U.S. stocks. I warned you not to look for the top, that bear markets happen gradually and then suddenly.
If you look at the S&P chart below, you will see that what I was describing is playing out. In October and November, the stock market was declining gradually. Then, in December, it fell suddenly.
In November, I also suggested you begin allocating assets toward the defensive sectors, such as utilities. Since my letter, the S&P is down 9.83%, and the utilities have outperformed the index by 5.11%.
The market is now in full panic mode. The fear of financial collapse has spread from Wall Street to average investors worldwide. Last week, mutual fund outflows (people taking their money out) were at their greatest levels since October 2008.
If you need more proof of the panic, look at the VIX, the Chicago Board Options Exchange volatility index. It is reaching levels we haven’t seen since the European debt crisis of 2011.
What Happens Next?
Well, the United States is still expanding, and it’s going to take some time before we see the official recession.
I believe the situation is going to play out like the early 2000s. The bear market will take maybe two years to run its course. Ultimately, we will be looking at a correction of about 50%, with the S&P 500 finding support close to the 2008 market top (previous resistance), in the range of 1,600 to 1,800.
I think we’ll see a minor hope rally in January (the bull trap), as we always do, then the market will start down again and officially hit bear territory. For the rest of 2019, we’ll see a continuous decline, with a lot of volatility, and large spikes in both directions.
Toward the latter part of 2019, expect a lot of zombie companies with high levels of debt to default. These kinds of companies lurk in the shadows of every bull market. They are driven by low interest rates and range from small caps to blue chips.
The ongoing defaults and fear about the future will lead first to reduced public spending and then to less business spending… which ultimately will push the economy into recession.
Looking further ahead inside my crystal ball, I see the market rebounding sometime in 2020, depending on how well the government and the Fed manage the crisis.
For those with cash to spare, this event will be like Black Friday on steroids. Stocks will be trading at massive discounts, and opportunities will be abundant across all sectors.
Don’t Survive The Collapse… Profit From It
If you want to continue holding stocks, I say again: Focus on the defensive sectors, such as utilities. These will suffer least from the collapse.
Alternatively, you could begin looking at other asset classes. Safe havens such as cash, bonds, and precious metals should provide protection during the downturn.
Cash, in particular, is an asset class investors often neglect and can provide a decent return, depending on the currency you hold. The most diversified way to hold cash can be a basket of major currencies (USD, JPY, EUR, GBP, AUD, CAD, CHF ). Thinking more specifically as I look ahead to the coming bear market, I am betting on the Japanese yen and the Australian dollar.
Coming Soon: True Retirement Wealth Is The Answer To Profiting Amidst The Turmoil
The most important thing to understand is that the coming turmoil does not need to be negative for your portfolio. Bear markets, because of their volatility, can offer great returns… if you know where to invest.
I have been watching, researching, and profiting from market ups and downs for 10 years. I see some of the greatest opportunities of our lifetime on the horizon.
That’s why I’m preparing for the launch of a new investment research service intended to help you protect and grow your portfolio and continue to build your retirement nest egg through the coming volatility of 2019 and beyond.
Watch this space for more details, coming soon.
Exciting times ahead.