This from Ted at Investor’s Daily Edge:

The stock market is still in panic mode; investors have lost too much and are dumping their stocks in an attempt to salvage what little money they have left.

The more they sell, the worse the market gets. The worse the market gets the more they sell. It’s like a nightmarish game of dominoes.

Granted the new giant stimulus package, a bigger round of rescues, and the largest deficit financing of all time are going to have an effect on this economic crisis. Some of these policies will help, but they may also backfire and aggravate the crisis. Just don’t count on the government to bail you out.

Unfortunately, it looks like the stock market will actually get worse before it gets better. Please don’t try to pick a bottom, bottom picking in this bear market is extremely risky so be careful. Wait to see a sustained recovery before stepping back into stocks.

Here are a few reasons to be bearish:

• GDP declined 6.2% in the fourth quarter and GDP will probably have a similar decline in the first quarter of this year. This is a much bigger drop than most experts were forecasting. And there is evidence that the decline is accelerating.
• U.S. consumer spending is dropping like a rock and this is killing the economy. Consumer spending accounts for about 70% of total economic activity in America.
• The media is extremely negative. Every time you turn the nightly news on, you see financial disaster everywhere. The news loves to report that more people are being laid off, more businesses are going bankrupt, real estate is going lower, etc. All this negativity scares people into selling their stocks and spending less.
• Government borrowing is exploding and this will have dire consequences including higher inflation.
• We are witnessing the collapse of a mountain of debt in the private sector and the public sector may be next. Many governments around the world could end up defaulting on their debt, which would have severe economic repercussions.
• The number of troubled banks is increasing and the amount of toxic assets on their books is continuing to expand rapidly.

The bad news is there is no growth engine, at the present time, to pull us out of this economic slump.

So what are we supposed to do now?

You need to protect your nest egg and protect yourself against further losses. Get your money growing again and protect your capital by cutting your losses. Lower your exposure to the stock market by selling off the poor performers and diversifying into contrarian investments like natural resources including gold and silver. Just use common sense and stay flexible with a well-balanced portfolio.

You should have at least 10% of your assets in gold and silver as an insurance policy. All of my indicators suggest these hard assets will soon move to new record highs. In fact, I think gold and silver are in for an extended bull market even as most stocks face an extended bear market.

You should also think about doing put options or shorts on weak companies. You can make a tremendous amount of money as a company’s stock declines. A good service to look at is Andrew Gordon’s Red Flag Insider. His service has performed extremely well in this bear market.

This economic crisis may not be over for years, but after the selling wave in stocks is over — I expect to see a major rally take place, with the Dow gaining back 50% or more of its losses in just months. So be prepared and I will keep you posted on how to play it.

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