The “Experts” Are at It Again
It looks like my former colleagues on Wall Street are at it again. Last week, the markets were heading up and everyone was calling an end to the shortest bear market in history.
Then, they reversed on Friday and headed back down, only to pop back up on Monday. They started the day on Tuesday heading several percent higher before reversing and closing the day at a loss.
But the word from the “experts” is that the bottom is in and it’s time to be buying stocks again.
Greed in Chart Form
As I’ve said before, and my colleagues Brit Ryle and Christian DeHaemer have been pointing out since the markets turned back around last week, bear markets don’t end in optimism. They end in despair.
And despair is not what I’m seeing out there right now.
Despair looks like this on a chart:
That was the Great Recession. Markets started to fall in 2008 but didn’t reach a bottom until 2009.
And it was pretty easy to tell the economy had hit rock bottom just by taking a drive down the road. Gold prices were so high that even gas stations were offering to buy up your unwanted jewelry:
That’s not what we’re seeing yet. What we’re seeing is a perfect picture of greed driven by unfounded optimism:
We’re not out of the woods by a long shot. Actually, we’re just on the edge of the forest:
That red circle marks where we are right now compared to the 2008/2009 crash. We’re in that retracement period where people forget what’s going on around them and start to act like everything is already back to “normal.”
But the thing is, we’re nowhere near “normal” and we’re not likely to get back to what “normal” used to be for months if not years.
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“Be Greedy When Others Are Fearful”
You’ve no doubt heard that the secret to success in the stock market is to be greedy when everyone else is running scared. But you might not realize that it works both ways.
You protect your profits by being fearful when everyone else is overly optimistic. You’ve got to be fearful when greed is all you see outside.
After a massive drop like what we got in early-March, it’s very common to see the market rally back up and retrace half of its recent fall. Call it what you will: bull trap, bear trap, sucker’s rally, or a dead cat bounce. No matter what the name, it’s bad news for investors who get caught up in the emotion.
We’re in the midst of one of those upward moves now. A 50% move back up from March’s lows puts us around 2,800 on the S&P 500. As I type this on Wednesday afternoon, it’s only 80 points south of that marker.
And once we complete that 50% retracement, the other shoe is going to fall and that index is going to at least retest its mid-March bottom at 2,200. If it breaks through that, then the next resistance levels are right around 2,000 and 1,800 — 26% and 33% lower, respectively, than where we were this Wednesday.
A 50% drop from the February highs would take us all the way back down to around 1,600 — that’s 40% more downside potentially ahead. And before you brush that off as fear mongering, remember that the 2008 financial crisis and the dot-com bubble (the last two bear markets) took stocks down roughly 50%, too. So that’s not as far-fetched as it might at first sound.
So, now is your chance to sell off your weaker stocks into rallies. Let the greedy traders end up holding the bag when the second shoe hits the ground. Get yourself a nice stockpile of cash (or dry powder) ready for strategic buys when we really hit rock bottom.
And pick up some gold. Remember what it did last time the Fed propped us up with free money:
It's Now or Never
This may be your last chance to sell into strength before we start the long slog back down. You don’t want to be left holding stocks when corporate earnings season starts in earnest next Tuesday, and we start to see just how bad things really got and just how long they’ll take to recover.
And if you’ve already sold into the strength but would like a little more dry powder on hand (or you just want to generate as much cash right now as possible), take some time today to reserve your free copy of my book, Endless Income.
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To your wealth,
After graduating Cum Laude in finance and economics, Jason analyzed complex projects and budgets for the U.S. Army. Then, at Morgan Stanley, he led the assistants' team for the North American repo sales desk, responsible for hundreds of multibillion-dollar trades every day. Jason is an editor for The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.
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