VOLATILITY — GET USE TO IT!

Here are three Wall Street Journal headlines that’ll make you scratch your head:

  • For Street Veterans, Past 3 Days Rank with ’87 Crash, ’08 Crisis
  • Dow Logs Another 400-Point Move (+423), and
  • Economists: U.S. Recession Risks Rise.

What you’re seeing in the stock market is a frazzled investor base that doesn’t know what to think and what to do from one moment to the next – and that includes “Street Veterans.

In 1987 Ronald Reagan was the President, national debt was 50% of GDP, and the underlying economy was strong. 2011 is nothing like that.

In 2008, prolonged government irresponsibility caused massive housing inflation for such a prolonged period that it caused the money market to collapse. Back then, national debt was 70% of GDP and total receipts to the U.S. government were $2.5 trillion.

Today is much different. Total receipts to the U.S. government are $2.1 trillion, national debt is 100% of GDP, all market fundamentals remain extremely negative, and the rest of the world is in worse condition.—And because of that investors are scared, Wall Street is trigger happy, and the average consumer is hurting.

That’s not a recipe for stock market serenity.

So this is not 1987 or 2008. Instead, this 2011 activity is a warning, a prelude to severe downside correction. If you can’t recall how often this kind of volatility occurred before September 2008 then read chapter 2 of my book again. The stock market is telling you something. Severe correction is in the air.

A severe correction will force the DJIA below the bottom of the action zone. This will occur once inflation and/or global turmoil forces interest rates higher. Then all hell will break out.

Be prepared