Recalling Black Monday 1987 and Why 2017 Is Not 1987

With so many analysts talking about Black Monday 1987 and trying to spot similarities, I thought I would dust off the technical charts from 1987 when I was a much younger investor than I am today, to show why I am fully invested and am not concerned about another “Black Monday” event.

Analysts and gurus would have investors believe that the collapse of the markets on Oct 19 1987 was an “out-of-the-blue” type event when in reality it was anything but. Instead there were many signs for investors before Black Monday advising to turn cautious and setup protection.

Market Direction Collapse of October 19 1987 – Black Monday

While many analysts and investors felt there were no warning signs for the Oct 19 1987 Black Monday crash they are wrong. There were many warnings signs for investors before the Black Monday crash of 20.4% in the S&P on Oct 19 1987. The S&P closed on Friday Oct 16 at $282.70 and fell to a low of $224.83 on Monday Oct 19. The Dow lost just over 22%.

I have included below, a daily S&P chart from August 1987 to October 1987 and marked the various events that told me and many others, that a pullback was going to happen in the markets. The signals I have listed below are from my notes at the time. I have re-written them for this article. While they did not advise that the market would drop 20% they did advise that protection should be bought, which is what I did. The SPY ETF was not available at this time. Instead I held put options on primarily banks and companies like Procter and Gamble, PepsiCo and Coca Cola. I was also holding 30% of my portfolio in bonds, which is the same amount I am holding today.

stock market direction crash of 2008

The Black Monday crash had many warning signs.

 

Warning Signals

Here are the signals that I was following that advised me that a larger decline was coming for the markets.

The crash actually started in Hong Kong and then Europe before hitting the North American markets. The stock market crash of 1987 and the May 6 2010 “flash crash” are probably the closest thing to a black swan type event I have experienced. However even with the 1987 collapse there were warning signals although no one anticipated the depth of losses of the one day plunge. I have marked the key points below, in the chart above.

A. The market direction was already lower in September and early October. The market was unable to stay above the 50 day simple moving average (SMA) and in September it had broken down to the 100 day exponential moving average (EMA). It was unable to make a new top to challenge the prior high in the S&P. If in 2017 we saw this same pattern where the S&P broke down below the 50 day and then the 100 day and was unable to recover the old highs, that would be a bearish signal. We have not yet seen anything similar.

B. Point B shows the 100 day exponential moving average (EMA) . You can see how the S&P was unable to recover the 100 or even the 50 day. In October before the crash, the 100 day was decisively broken through which is a strong warning signal to buy protection. Today with the SPY ETF any investor can buy cheap out of the money protection on any such signal. As well we have numerous bear ETFs such as the SQQQ or SDOW which also provide very good levels of protection. In 1987 these were not available.

C. Momentum had tried to recover in late September and early October 1987 and failed. By the second week of October, the S&P momentum was negative and continuing to strengthen to the downside, as the S&P was falling below the 100 day moving average.

D. Two days before the crash, the S&P broke through to the 200 day moving average and did not bounce, which was very bearish. Note that there was no bounce off the 100 day during the second week of October, another bearish signal.

E. The market leading up to the crash tried for 4 days to hold the 100 day exponential moving average (EMA) and failed. Today with all the securities available to buy protection, it would be easy to jump in and buy some protection.

F. The break to the 200 day exponential moving average (EMA) saw the S&P not only not bounce, but the day before the crash, the S&P fell by 5.8%. A drop today (Oct 19 2017) in the S&P of 5.8% in a single day would be a drop of 148 points. Wouldn’t that tell you to buy protection? In 1987 it certainly told me that something bigger was coming. I sold some shares on that day but bought put options on the handful of stocks that had options available. In 1987, the majority of stocks did not have options available and trading in options was done with a full service broker on the phone or in person and done in what was called over-the-counter. Commissions were insanely high. I remember buying some put options on Coca Cola Stock and arguing with the full service broker who was determined that I was wasting my capital by buying put options. Thank goodness those days are gone.

The day before the crash the S&P was well below the 200 day moving average, yet another bearish signal.

Momentum from point C through to F had turned decidedly bearish which was another warning signal.

G. Last was MACD which had twice issued sell signals on the S&P 500 since the end of August. A double sell signal in such a short period is another signal to be cautious.

Review 1987 By Week

To make it even easier to see that the S&P was in trouble, all you had to do was look at the year 1987 and set the time frame for 1 week. You could immediately see that the S&P had made a market top and then retried to break to a new top. That failed and the market then broke down. A failed second top is always a strong warning that the market direction up is in trouble. The days leading up to the crash are shown in a 1 week candlestick below. You can see that the one week candlestick even on its own was a clear warning signal to stay cautious.

The Year 1987 In Weekly Format

Review Past 12 Months By Week

To compare, let’s bring up the past 12 months of the S&P and set it for weekly. Even removing the major moving averages makes no difference to the outlook. Note how all we see is a pattern of higher highs and higher lows. This is a bull market without any signs of an impending collapse.

S&P 12 Months to Oct 19 2017

 

 

 

Summary – No Worries

The majority of analysts today were not around in 1987 trading in the market that fell apart. I was. The put options I bought covered a lot of the losses but not all of them. Instead holding 30% of my portfolio in bonds in 1987 did recover the stock losses, as bonds shot higher as demand from stock investors was unprecedented and I sold many bonds in the collapse of October 1987 for large profits. These more than covered the losses I took in stocks.

As you have seen while many analysts would have you believe that the collapse of Black Monday 1987, seemed like a bolt of lightening hitting the S&P, there were indeed many signals that the S&P was in trouble and plenty of time to even partly protect portfolios.

Today the method to protect a portfolio from another Black Monday, would be to buy the ultra short ETFs or Spy Put ETFs rather than individual stock put options, if the S&P 500 broke the 100 day moving average and fell toward the 200 day moving average. At present there are no signals advising us that is about to happen.

A large problem in 1987 was the difficulty in protecting a portfolio from big down days. Calling a broker and placing a trade was incredibly difficult on a day like Black Monday and even on the Friday before Black Monday when the market fell over 5%,  telephone lines rang busy. Even orders placed, often failed to be filled as the market was moving so quickly that orders were being dropped faster than they could be filled.

Today there are far better products and methods for protecting as well as profiting from such events but as we have seen, 2017 to date, has shown no similarities with 1987 and no signals that the market is on the verge of an impending collapse.

 





 

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