turn-around?

History Repeats Itself


There have been a number of market wrenching events over the last 15 years. All of them have been different, but the results were always the same: Every major crisis over the last 15 years has followed a strikingly similar (and profitable) pattern.

The Asian currency crisis in 1997 started off just like everything else. The markets were humming along... Then there’s the whiff of a large problem, which got progressively worse as investors figured out what was really going on. Investors sold in a panic as the problems appeared “systemic.” Then the central banks stepped in, papered over it...

All the extra cash floating around found a home somewhere and a new bubble or bull market is born.

The Russian debt crisis of 1998 followed a similar route. It was unexpected, posed systemic risks, and caused a lot of fear and aggressive selling.

The end result was the same: The coordinated central bank actions to prevent a global economic catastrophe simply papered over the problem.

These two events and the central banks’ aggressive responses laid the foundation for the dot-com bubble that followed. And when that bubble burst, it was no different

The downturn stemming from the dot-com bust sunk the markets. Central banks stepped in, slashed interest rates, and papered over any problems. The housing bubble and Dow 14,000 were the inevitable results.

The Euro crisis is shaping up to have similar ending.

And it means 2012 could be surprising strong. In fact, one indicator says the worst is likely behind us...

VIX Marks the Bottom

The CBOE Volatility Index, aka “the VIX” or the “Fear Index,” is one of the most useful market indicators ever devised.

Since it directly measures the market demand for “insurance” against a market crash, it directly tracks the levels of fear in a market.

The image below tracks the VIX over the last 15 years.

It shows how it has marked the bottom of each major crisis and when a major turnaround for stocks began:


As you can see, each spike in fear levels came precisely at times when stocks would take off.