Has The Crash Sequence Begun?

All the necessary conditions are in place.  After Tuesday's trading, both the Dow Jones Industrial Average ( DJIA) and the Standard & Poor's 500 (SPX) had posted gains in 10 of the last 11 trading days.  Such strings are very, very rare.  They indicate panic.  In this case, all the short-sellers who had gotten aggressive, have been sent running for cover.

Market sentiment, which had gotten quite bearish, is now pretty bullish especially on the back of a slew of earnings reports which have deluded investors into believing that the economic "recovery" is gaining momentum.  It isn't.  Apple is not enough to save the economy.

Earnings are backward looking.  They have absolutely NO predictive value.  In fact, market bubbles peak when the news is great.  Market bottoms occur when the sky is falling.  In 1929, economists believed that the market had achieved a new plateau.  They were wrong.  In 2000, investment analysts talked about a new investment paradigm of valuation not mattering.  They were wrong.  All those hot internet stocks went bankrupt by the dozens.

The important thing to note is that it is not too late to protect your remaining assets.  Down 50%?  Fine.  You want to lose another 50%?

The most important goal for any investor here should be survival.  There will be other times to participate in stocks and other investments.  There will be lower risk entry points.  Better that you preserve your liquid assets to enter when everyone else has been wiped out. 

If you're new to this column, you may wish to read two recent pieces on why the current situation is so damn dangerous:  http://markostake.blogspot.com/2010/07/8-more-reasons-to-avoid-stocks.html and http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.

You can also profit from the coming market meltdown, but be aware that short-selling and the use of inverse ETFs is very treacherous and not for the feint of heart or risk-averse.  I do, however, recommend at least a small position as a hedge to offset losses in your other assets.

Should you load up on Gold here or precious metals mining stocks?  Probably not yet, even though Gold may perform well in a crisis situation.  If we're in the middle of another deflation scare, they are unlikely to be unscathed.  That said, Gold will probably be the best asset to hold value even in the worst scenario.  However, as investors seek liquidity to meet margin calls or redemptions, they will be forced to sell the most liquid assets.  Be patient.  There will be a much better time to load the truck.

It's also time to review all your assets and exposures.  Very few will escape the imminent market meltdown.
The only assets likely to perform here are very safe bonds.  In a deflation scare, interest rates are likely to either stay very low or go even lower.  The deservedly much-maligned U.S. Dollar ought to continue to see "flight-to-safety" interest.

If I'm right about what's coming down the pike, life as we know it will turn into life as we KNEW it.

Marko's Take