INVESTING: Hold on tight! Stock market carnage is coming

People love suspense. A little uncertainty creates excitement and holds people’s interest. This is true to some degree with investors in the stock market, despite the claim from experts that investors despise uncertainty (as if you can be really sure about something as crazy as the stock market). Success in the stock market is all about probabilities, and having the fortitude to live with a lot of mistakes.

In December, I wrote that I did not think 2006 was going to be a good year for stocks (specifically, I theorized that because the S&P 500 had not corrected more than 8 percent from any recent high since March 2003, it would happen this year).

As we have gone through the year, I have gotten more and more bearish. Consistent readers of this column have been rewarded through the warnings I have sounded the last few months. The markets have been savaged in the last two weeks, and it has been a real pleasure not being involved in the train wreck.

I wasn’t looking at a crystal ball when I said the market was going to get roughed up. I use more than 120 technical indicators, some of which I discuss from time to time here. These indicators are not fool-proof, but by combining them I can establish possible outcomes. Living without a crystal ball is what re-energizes me every morning, but I do like to tilt the odds in my favor as much as I can.

Now that the action in the market has picked up, certain indicators are showing us that investors are getting nervous. Experts and professionals, however, are shouting that these lower prices represent great buying opportunities.

Please read what I am about to say carefully: Listening to the so-called experts is exactly how investors get taken to the slaughterhouse. The market may rebound for a few weeks, but I am going to sell as much as I can into any strength I see. The power behind the recent sell-off is not setting up a sustainable rally. Rather, it’s setting the stage for what will turn out to be a protracted decline.

I would suggest staying heavily defensive until the indicators begin to show that investors are increasing their appetite for stocks. This could take a few months, but it could last quite a bit longer.

In 1970, the Dow Jones industrial average came within a few ticks of its all-time high set in 1966, then fell 35 percent in six months. In 1973, the Dow exceeded its all-time high by a few ticks, then fell 48 percent in 14 months.

How long this bear market is going to last is not important right now. The priority is to get safe and get protected. You are going to start to hear a lot of garbage from your brokers, advisers, whomever. Things like this: “Stick with the long term. This is a great buying opportunity. Don’t try to time the market.” And that advice is going to lead to more losses.

Not knowing what tomorrow brings, let’s enjoy the ride. Being unprepared for what could happen is foolish. The stock market could experience horrible losses over the next several months. The probabilities suggest that at the very least, staying out for a while is prudent. Here’s one sure thing:You won’t lose anything sitting in cash.