How Deep Of A Decline Waits Ahead?

Written by James Dines
Posted January 25, 2019 at 7:00PM

Publisher's Note: Today we're bringing you an answer to a question we're seeing a whole lot of these days.

Mr. James Dines is a legend and he's been proving it more than ever with his market analysis over the last couple years. Here is the latest from him through an excerpt from The Dines Letter.

If there is anyone to listen to right now, this is the man.

To your wealth,

Nick Hodge Signature

Nick Hodge
Publisher, Outsider Club


The world’s investors are groggily awakening from a 9-year trance, having been hypnotized by the Pavlovian lure of stocks always going up.

But cycles have not yet been repeated.

Suddenly, the U.S. dollar has stopped going up and the yield on the 10-year Treasuries dropped from above 3.25% to 2.72%.

Crude oil prices are currently unpredictable because they are privately controlled by a small group of governments, and have been knocked down toward bargain levels under $50/bbl.

While Decembers are usually quiet for stock markets, that stocks suddenly plummeted in December is an omen of caution for 2019.

One reason the Dow Jones Industrial Average (DJI) kept going up despite a deteriorating internal market was because of passive investors. For example, investments made with automatic, retirement-plan deductions from employees’ paychecks towards ETF buying.

Such buying continued whether the DJI went up or down, which is the secret of why leading averages were holding up, even while a bear market began with DIDM.

Furthermore, we’ve never before witnessed such a large professional component owning stocks instead of individual investors, and it has been a whole decade without a single serious bear market, leaving newer investors very spoiled and unprepared for the mirror image: Alice in Wonderland’s other side of the looking glass. Even the mirror has two different faces!

When ETFs begin to get a surge of sell orders, they in turn have to sell some of their holdings. With many stocks selling for hundreds of dollars apiece, the large blocks that ETFs hold, splashing into the stock market’s pool, will place severe pressure on stock prices. And, in a bear market, who would buy blocks of those high-priced stocks?

Automatic buying will soon be swamped by a torrent of selling, and will produce sudden downside gaps. It’s one thing for fund buyers to buy stocks unhurriedly during quietly rising markets, day after day, but quite another for a fund to try to sell a large block of a stock selling for around $500.

This is a serious warning: without time to sell leisurely, stocks must be sold in advance for best results. Once the main downplunges begin, mass fear and contagion will drive others to sell, and that’s where a severe stock market plunge could begin.

Some investors wait because they are unwilling to surrender the remaining last hope. Because of the huge professional component, we expect the next bear market to be steep rather than drifting slowly lower. Massive buying of gold should arrive soon. We wish we could provide the precise moment.

Are there any grounds for optimism? Yes. The one thing that crops up in our thinking is that the S&P 500 has not really yet gone down as steeply as in previous crashes in 2000 and 2008

Even though German bluechip Deutsche Bank is down 56% in 2018, the S&P 500 is now down only 20% since September 2018 compared with over 50% in 2000 and 2008.

We pondered on whether it means that this is an “invisible crash,” concealed by the aforementioned rigid buying programs. Or perhaps it confirms our fading theory that recent market action is merely group rotation instead of a bear market.

In that case, 2018 would have been like the flat market of 2016 that exploded to the upside the morning after Trump’s surprise election.

That far-forward thinking is not yet clear to us, and we would have to handle it by IWBs. Bottom line, let’s wait a bit to see if we can buy stocks a little cheaper.

As William Shakespeare said, “Fortune brings in some boats that are not steered.”

Meanwhile, our skeptical caution in 2018 has left you with cash, and ready to buy bargains. Actually, as this is written, we’re beginning to sense a surprise rally in early 2019, and it could be a strong one — albeit unlikely to rise decisively above the all-time highs, which is a last for the bull market. Hold the buying power, and some precious metals.

First the lightning, then the thunder.


James Dines is legendary for having made correct forecasts that were in complete contradiction to the rest of the financial community. He is the author of five highly regarded books, including "Goldbug!," in addition to his popular newsletter, The Dines Letter, and videotaped educational series. Dines' highly successful investment strategies have been praised by Barron's, Financial Times, Forbes, Moneyline, and The New York Times, among others.

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