The Dow looks to be in the throes of a 420-point plunge, even if sellers were unable to deliver the haymaker yesterday that would have put bulls down for the count. At the final bell, the drop amounted to only 144 points, although it would have been closer to 200 points at the day’s lows.  If our prediction of a further 276-point fall over the very near-term pans out, pushing the blue chip average slightly below 10000, that would be just a very small downpayment on all of the plunging the Dow will still have to do to catch up with a U.S. and global economy that have begun to relapse into deep coma. Dow 5000, anybody?  Whatever happens, it seems clear already that the highs achieved by the broad averages earlier this month marked a last hurrah for the most recent bear-rally cycle, and that the major bear market begun from Dow 14198 in October of 2007 has resumed.

In retrospect, it’s hard to imagine how DaBoyz could have succeeded to the extent they did this summer, manipulating an 1100-point surge in the Dow Industrials since early July. The economic landscape hasn’t looked as dark since the early days of the Great Depression. Unemployment will only rise in the months, or perhaps years, ahead; real estate prices have failed to respond to trillions of dollars worth of direct and indirect stimulus; and all of the Government’s bailouts have produced not even an iota of sustainable economic growth. Put all of these factors together, and many not mentioned, and Wall Street pros who bought into the rally should be wondering, “What were we thinking?”

Threat Is Waxing

Looking ahead, although a bout of further weakness might be satisfying to those who have yearned to see stocks get in line, finally, with the grim realities noted above, it remains to be seen what form the decline of shares will take. We raised the possibility here the other day that a full-blown collapse may already be under way and that only the element of momentum is lacking to put some hair on the chest of a bear that showed its incisors last Wednesday via a 216-point plunge in the Dow. We think the most likely scenario is for stocks to continue to drift lower between now and the November elections, but with sharp rallies along the way to keep bears at bay. As this occurs, however, the chance of an outright crash, with the Dow falling 3000-4000 points in a matter of two or three weeks, will be with us more less constantly. It could begin tomorrow, or next week, or at any time in September or October. But make no mistake, it is surely coming.

Investors who want to avoid disaster should be at least 80% in Treasurys right now, since the preservation of capital is paramount. This next phase of the bear market is going to make the deep economic trough of the early 1970s look like a picnic. Back then, the economy was in a secular credit expansion that resumed following the 1973-4 bear market. This time, credit is collapsing and consumers will be unable to reverse the trend. Economic growth is going to swing negative in 2011, and it’s possible it will remain negative by as much as 2% to 3% for a couple of years.  That the stock markets have yet to discount an economic implosion of this degree implies that the collapse in share values just ahead will be devastating.  If you’ve been hanging onto stocks, lulled by this summer’s hoax into believing there’s no need to rush for the exit, think again.  It’s time to get ready for the most destructive and precipitous phase of this Great-Recession-or-Worse.