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Prepare to Profit From the Next Stock Market Crash
The notion of a stock market crash is a terrifying thought for most investors.
But it shouldn't be.
After all, stock market crashes, properly played, can be just as profitable – if not more so – than bull-runs.Of course, the trick to profiting from stock market crashes is predicting them.
That's where I can help.
You see, a relatively simple analysis shows that the Dow Jones Industrial Average has gotten ahead of itself. More than that, it's giving a pretty clear signal about where the blue-chip benchmark is headed.Let me explain …
A Market Mismatch
Despite any recent losses the stock market is still extremely high by historical standards.
Remember, it wasn't so long ago – February 1995 – that the Dow first passed 4,000. That was thought to be a pretty high level at the time, as it was almost 50% higher than the 1987 peak.
The Dow closed yesterday (Monday) at 11,043.56, which is inconsistent with economic growth prospects.
That is, nominal gross domestic product (GDP) in the second quarter of 2011 was up 105% from the first quarter of 1995. So if you assume that the stock market over time should follow national output, then a middling level for the Dow today would be about 8,200 – more than 2,500 points below the present level.
And keep in mind that that's a middling level – not a bear market.
If you want an idea of how far the Dow might slump in a bear market, you can take the 777 at which the index stood in August 1982 – before the great bull market began – and inflate it by the progress of GDP since then. If you do that, you get a bear- market target of about 3,600 for the Dow.
Incidentally, a few years ago I met Kevin Hassett, the AEI scholar, who along with James Glassman wrote a book in 1999 called "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market." He's a very nice guy. I made a bet with him that the Dow will reach 3,600 before it gets to 36,000. He's teased me about it since saying I lost my chance, but it looks as though I may get him yet.
A Matter of Motivation
The stock market may be significantly higher than it was in 1995, but I assure you our economy is no better off.
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