Another 'Freefall' to Push Dow Below 5000: Strategist

The CBOE volatility index, widely considered the best gauge of fear in the market, is trading above 25 Thursday. Is this volatility good for the market? James Hardesty, president, market strategist and chief economist at Hardesty Capital Management and David Hefty, CEO of Cornerstone Wealth Management shared their insights.

“It undermines investor confidence and confidence is important in pushing this market higher,” Hardesty told CNBC.

Hardesty sees “much strength” in the economy and said the market has room to reach 11,500 to 12,000 by year-end. (Scroll down to see Hefty's full stock picks.)

In the meantime, Hefty warned investors that although the markets are going to rise in the near-term, a sudden “freefall” is expected.

“Our number one focus on this volatility is not about how high the markets are going to go, but when the market is going to make that turn because when it does, we believe that it’s going to go into a complete freefall like we saw in oil back in 2008 that could push the Dow as low as 5,000 or lower by the end of the year,” he said.

Hefty said a “handful of very serious catalysts” are going to push the markets down such as a “disappointing” second quarter GDP and rising foreclosure rates.

“And when we look at China—China’s just another version of Dubai, but in a greater scale,” he warned. “Not only are they going to face a real estate crash, but they’ll face inflation so they’ll have to slow their economy down in the midst of a real estate crash.”

“And the freefall is due to the fact that our financial system has $17 trillion of leverage and it only takes a handful of hedge funds to get a margin call before we start to see this freefall take place,” added Hefty.

Hardesty Likes:

Johnson & Johnson



  • Watch Hardesty's Previous Appearance on CNBC (Mar. 15, 2010)
  • Watch Hefty's Previous Appearance on CNBC (Mar. 30, 2010)

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No immediate information was available for Hardesty or Hefty.