History Doesn't Repeat, but It Does Rhyme

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These are the profound words of Mark Twain. Although no two markets are exactly alike, today I’ll examine the phenomenon known as "blood in the streets," an occurrence that repeats throughout market history. I’m not giving you investment advice here; rather, I’m presenting two specific commodities that are potentially ringing the bell you hear at, or near, the bottom.

In previous letters, I've discussed the recent commodity meltdown. Last week the dollar was trading at seven-month highs and gold closed below $800 an ounce for the first time this year. The master commodity, crude oil, is now more than $30 a barrel off its highs, and this is a major reason for weakness in the outside markets.

I’ve been looking for commodities as an asset class to bottom out as the Olympics come to an end. Beijing has effectively shut down 350 industries and an estimated 7 million cars are off the roads. No wonder world oil consumption is down. Just a 1-million-barrel swing in demand can swing the world’s marginal demand from a shortage to a surplus condition.

As oil goes, so goes a host of commodities. The stock markets of the world are bouncing, but after a 25 percent break from the October top, an 8 percent to 9 percent upside correction is considered normal for a major bear market. Certainly, most of the major markets and asset classes are related today.

Bottom picking is tricky. Markets in bear trends will exhibit sharp, short-covering rallies at times, and bottoms rarely occur in a "V" (straight down, then straight up). Still, I see signs in two commodities that bottoms are forming. This often takes place after the blood in the streets, and this is what blood in the streets looks like.

September 2008 Silver

Silver collapsed last week, falling more than 40 percent from the top, dropping 20 percent from week-earlier levels, with a $1.42-an-ounce break on Friday, 60 cents above the overnight lows. There may have been a bigger silver break in history, but I don’t remember it. This is the blood in the streets seen at market bottoms as the last weakening longs capitulate.

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What’s Happening in the Commodities Markets?

Commodities prices have been on a wild roller coaster ride lately, but the long-term natural resource boom is here to stay.

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