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Storm Clouds Forming Over 2010

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It's too early to tell when the tempest will descend, but now's the time to prepare.

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As we enter 2010, the sun shines brightly on both the US stock market and the global economy. However, dark massive clouds are piling up on the horizon: A serious foreboding of a storm coming -- and coming soon. It's too early to tell when the tempest will descend, but winds are building and it's time to get prepared. So -- are you prepared?

The first sign of warning is the very low VIX (volatility Index). The VIX reading as I write is where it was in late 2007, right before the mother of all market tsunamis hit global markets. This low VIX simply means that complacency about the dark clouds forming is way too high. It's an early warning sign to get your disaster plan in place right now.

Another storm portent is the extreme bullish sentiment readings.The recent investor intelligence polls show the lowest number of bears since 1987 -- and we all know the famous stock market crash that followed. The bearish readings are even below the record low number of bulls registered in March '09, right at the bottom. The stock market has rallied over 60% since that March low because everyone was bearish. Now everyone is bullish. So isn't it possible that the market could drop 20-50% in 2010 from wherever it finally tops out? You'll need a reliable sell signal to let you know when you need protection from the violent storm before it hits and wipes your portfolio out.

One of the biggest baddest clouds on the horizon is the seasonality of the stock market. Over the past decade, stocks have started some heavy storms in the first few months of the new year. Most recently was the 1400-point loss in early 2008 and last year's gigantic loss. The total loss in the Dow Jones Industrial Average -- which began in the new year through to the ultimate bottom on March 9, 2009 -- was a complete market crash. So you better be ready for a possible Katrina-like market hurricane.

Another, somewhat freaky sign is how poorly the DJIA performs in years ending in "00." Since 1900, nine of the last 11 years ending in "00" showed a decline of nearly 15%. The year that resembles the present most closely is 1930. Both periods have had volcanic market eruptions and a resulting lava flow of deflation. When you observe the 2008, you'll see some similarities to the 1929 crash -- but in slower motion. The giant multi-month rally since March 2009 also has some similarities to the early 1930 rally of nearly 50%. The DJIA declined 38.63% from the opening price in 1930 to the DJIA intra-year low. Folks, you need to prepare yourself for the worst.
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No positions in stocks mentioned.
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