ETF investors brace themselves for more pain this week. World stocks plummeted Monday as fears gripped investors that a deteriorating U.S. economy would drag others down with it. Toby Anderson from the Associated Press Reports:

  • The U.K. benchmark FTSE-100 dropped 4.7 percent to 5,625.20; France’s CAC-40 Index plunged 5.9 percent to 4,793.39, while Germany’s blue-chip DAX 30 slumped 6.74 percent to 6,821.42.
  • In Asia, India’s benchmark stock index tumbled 7.4 percent, while Hong Kong’s blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks.
  • Canadian stocks fell as well, with the S&P/TSX composite index on the Toronto Stock Exchange down 4.8 percent. In Brazil, stocks plunged 6.9 percent on the main index of Sao Paulo’s Bovespa exchange.
  • In Tokyo trading, exporters got hit hard, partly because of the yen’s recent strength against the dollar.
  • India’s the benchmark Sensex index fell 1,353 points, or 7.4 percent — its second-biggest percentage drop ever — to 17,605.35 points. At one point, it was down nearly 11 percent.
  • The VDAX-New Index, a benchmark gage of European stock- market volatility, surged as much as 39 percent, the most since 2001.

A decline of more than 20 percent is the common definition of a bear market. Most world markets have now given back at least 20%. As of Friday, the Dow, S&P and Nasdaq are 15-18% off of their recent highs reached in October 2007.

Trading in the U.S. is closed today for Martin Luther King Day. Futures on the Standard & Poor’s 500 Index sank 3.4 percent.

The slump has made stocks cheap by historical standards. Europe’s Stoxx 600 is valued at 11.1 times its companies’ profits, the lowest since at least 2002, according to data compiled by Bloomberg. The 1,953-member MSCI World has a price- earnings ratio of 14.3, the cheapest since at least 1998.

It’s times like these that drive home the importance of having a well defined exit strategy. Although it may seem that the opportunity to sell has past, there is a good chance global markets could decline further before they recover.

Investors tend to stick their heads in the sand during these times hoping the bleeding will stop and the market will take care of itself. Taking a few steps to protect your portfolio from another possible 10-20% decline may be prudent. If the worst is over, buying back in when markets once again advance above their trend lines (200-day averages) is a sound strategy.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.