Party Like It's 2003

The Dow (DJI) has already lost more than 1,000 points this week and closed at levels not seen since 2003. Understandably, many investors are praying for a bottom here, and there are plenty of people out there calling for one. But I need you to understand that we have not reached the bottom yet. And there's a simple reason why I know that there is more pain ahead. Check out today's Rant to see why I'm certain we'll see Dow 8,500 before this mess is over, and to learn why you must prepare your portfolio now for the next leg down.

Toby

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Protect Yourself From Dow 8,500

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One of my favorite authors, William Blake, had it right when he said, "The road of excess leads to the palace of wisdom."

Well, based on the level of excesses we've seen in our financial system, we're going to have one hell of a palace -- but it ain't ready yet.

For months I've been telling you that a big part of your portfolio should be comprised of short-side investments and hedges as protection against the financial meltdown. My own portfolio is currently more than 70% short, and my trading capital is about 90% short.

I hope that the last few trading days have proved why it is so important to hedge your portfolio.

Slowdown Turns Into Recession

Many people are calling for a bottom here, but don't believe them. Sure, we'll see big up days, but they will only be bear market rallies.

The slow-moving market crash that we have witnessed up to this point has kicked into high speed. Until now, the economic slowdown in the United States and Europe was a slow-motion decline, but it's turned into a fast-moving one. The contraction rate of our economy has doubled in speed since early September, and the market knows it.

This "fever" -- i.e., the credit contagion -- really set in with Lehman Brothers' (LEHMQ) failure. And now the real consumer-led recession, which we've been forecasting since the beginning of the year, is here with a vengeance.

Mark my words: This fever will break. And when it does, there will be historic buying opportunities in great companies, and investors who have the cash to take advantage of it are going to make historic profits.

But I don't want to sugarcoat things when it comes to the short term. It is way too early to call a bottom in the market, because the real recession has just begun.

Markets bottom in the middle of recessions, and we're at least a few quarters away from a bottom in this consumer-led contraction.

We're in a massive worldwide de-leveraging panic that has led to forced selling and forced liquidations, and there's more pain ahead.

Emerging countries are dropping 25% in a couple of days. Sell stops and forced liquidations are hitting the market every minute -- $500 billion in withdrawals at hedge funds, $200 billion in mutual funds and gaining -- and we can't absorb it.

The Fed is providing every form of medicine possible. On Tuesday, it took over commercial paper financing, and today we received an emergency half-point rate cut.

But despite these desperate moves, this is still not the time for investors to be brave.

Lowered Expectations

Based on our latest ChangeWave survey numbers, I'm adjusting a number of my forecasts.

I'm raising my unemployment rate forecast from 7% to 7.5%-8%, and I'm pushing my market bottom forecast out six to nine months, into 2009.

I believe the U.S. recession is going to last for at least two to three quarters. It could even be five to six quarters when it's all said and done. (It really depends on the strength of the coordinated world effort to fill the $5 trillion black hole of bad debt.)

The acceleration in the economic contraction has caused me to lower my market forecast, as well. I'd say we're likely to see Dow (DJI) 8,500. And, as is true anytime a bubble has burst, the overshoot could be 5% to 10% below those levels.

Folks, this is the reality we're facing. The minor economic chest pain we felt six months ago has turned into a heart attack.

And this level of disease is not priced into equities -- earnings expectations for 2009 are still way too high. For example, Wall Street's is forecasting S&P 500 (SPX) earnings at $94 per share in 2009 -- a 14% gain from 2008. I can tell you that it's going to be closer to $72 a share.

We will head lower as reality gets priced into stocks. I honestly believe we'll hit 8,500 on the Dow, and you need to prepare your portfolio now so that you have buying power when the time comes to be brave.

Toby

P.S. Investors with buying power will have the opportunity to make historic profits when the market does bottom. In the meantime, you must hedge your portfolio, or you risk losing it all. At ChangeWave Investing, we have a number of great short-side plays that will keep us profiting all the way to Dow 8,500. Join us today to get in on these plays.

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Ask Toby: How Uncle Sam's Bailout Plan Stacks Up

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In today's video, Toby weighs in on the long-term implications of the government's bailout bill.

Watch 'Bulls & Bears' on Fox News

Be sure to tune in to Fox News Channel this weekend and join Toby and the crew on "Bulls & Bears" for their weekly market roundtable as they kick off the Fox News Channel business block on Saturday, Oct. 11, at 10 a.m. Eastern. ("Bulls & Bears" replays at 4 p.m. Eastern, Sunday, Oct. 12, and 4 a.m. Eastern, Monday, Oct. 13.) Or you can catch the show Saturday evenings at 6 p.m. Eastern on the Fox Business Network.

Make This Earnings Season a Blowout for You!

Earnings season is almost here, and now is your opportunity to sign up for the free Earnings Edge e-letter.

Each day, you'll be provided with an opportunity to double your money.

Don't wait. Get your Edge today!

Wine Find: Bordeaux State of Mind

I was at Sherry-Lehmann Wine and Spirits in New York City last week, and I tasted a number of the wines in their Unsung Heroes of Bordeaux Autumn 2008 Sampler. I want to share my favorites with you.

The Chateau du Pin 2005 is a blend of 66% Merlot and 33% Cabernet. You get the blackberry and raspberry notes we love in Bordeaux at an unbeatable price -- only $10 per bottle!

The Chateau Roquefort 2005 is a Merlot-based wine from Bordeaux's Right Bank (of the Gironde River). It is inky and soft in the mouth, and drinkable now. At $12 a bottle, it's another steal.

To share your favorite wine or food experience, e-mail me through the form at: www.changewave.com.

Join ChangeWave at the D.C. Money Show and Las Vegas Traders Expo

You and a guest are invited to join ChangeWave at the D.C. Money Show and the Las Vegas Traders Expo.

At the D.C. Money Show, you'll find more than 50 top financial experts who will address the biggest challenges in this volatile market.

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And at the Las Vegas Traders Expo, you'll have the opportunity to network with the best traders in the country and attend workshops designed specifically to help you make better trading decisions immediately.

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