Markets are leaving the twilight zone

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Market historian Bob Hoye from characterizes the hit to markets so far as an item from the twilight zone. While he believes that the initial down leg is ending, there likely remains more trouble ahead.

Listen to Bob Hoye's latest take on the markets

Central banks have played a key role in getting us to this point, explains Hoye. They are very good at helping with easy money. Asset prices then go up, then prices get overdone until we eventually reach speculative exhaustion. Then prices come down. Late buyers using leverage then face the margin clerk. At that point, there is a shift in power away from the central bankers to the margin clerks who have immense power to drive prices down.

Hoye says,

This is why stock markets go down so fast after a speculative binge. This is what we had. It came down to the day before Christmas when stocks, crude oil, junk bonds, base metals and things like that were really beat up and technically oversold.

In any hard-pressed market, you are going to get bounces, notes Hoye. After this bounce, Hoye thinks this time around there eventually will be a test of the previous low. For crude oil, Hoye thinks maybe we can get one more decline in crude oil this month which would finish off seasonal weakness. Once we get past those next pullbacks in stocks and oil, we could have firming markets in the first quarter. But Hoye warns:

It should be understood that these would be tradable rebounds within a long post-bubble contraction

Indeed, early in the week, Hoye's bearish-spring-board-sell-the-rally signal kicked in.

Hoye is a big believer in the usefulness of market history and makes the case for investors to have a historical model to provide a path from a highly speculative market to the demise of that market, then use that model with technical tools to help navigate volatile times. 

The history of previous great bubbles and their setups are similar and then the final rush up of excitement are similar and then the rollover is similar.

However, Hoye finds there is one thing missing this time, at least so far: no major insolvency announcement. While that has meant little drama so far, stay tuned. Hoye suggests we may get there after mid-year.

Hoye covers much more in the interview, including how history suggests we are not going to get out of the current situation by trading sideways.


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