Jeff Bailey : 10/23/2005 4:10:46 PM
Black Monday 10/19/87 ... Took place on the Monday following the 3rd Friday. That was then, this is now calendar Link
The stock market didn't just "crash" and find its end on October 19, 1987. Crisis can equal opportunity. For bears and bulls!
There are some eerie similarities, if not coincidences today, which were found roughly 18 years ago.
Coincidence: Market Monitor subscribers may have enjoyed some of this week's commentary regarding Fed Chairman Alan Greenspan as he sets to retire. Yes! Mr. Greenspan was just starting his career as the head of the U.S. central bank in 1987. Certainly he was responsible for what was about to happen on "Black Monday." Some believe Mr. Greenspan has a self serving agenda as he sets to retire. It would be fitting for the markets to crash just prior to his retirement.
History:When history is reviewed, it was shortly after October 12 that major brokerage houses and Federal banking and stock exchange heads began contemplating the sudden and inexplicable 200-point decline prior to October 19.
Equity market losses weren't confined to U.S. markets on 10/19/87 (Australia -45.8%, Canada -22.5%, Hong Kong -45.8%, United Kingdom -26.4%) and several macroeconomic factors were cited for the sudden decline.
One factor cited most was longer-term Treasury YIELDS that had started 1987 at 7.6% had climbed to 10%, where this high YIELD may have become so lucrative to investors that they fled stocks looking for yield. Here's a present day chart of the 30-year Treasury YIELD Link where yield stands at 4.609% having started the year (2005) out at 4.822%.
Note: Longer-term rates are lower-to-unchanged than they were at the beginning of this year!
(Question I Have: When did Mr. Greenspan observe publicly that homeowners would have saved a fortune had they used adjustable rate mortgages?(see 10/18/2005 08:59:18)
Some believe complex hedges and program trading algorithms sent the equity markets plunging, with the Dow Industrials recording its largest percentage decline in a single day. Note: Trading curbs were put in place late Thursday (10/20/05)
Not unlike present day (10/21/05), the U.S. trade deficit was rising in 1987. In October of 1987 the value of the U.S. dollar began to decline sharply. Note: Of late (10/21/05) the dollar has been rising. Point and figure chart of the U.S. Dollar Index at this Link
Now that we have some further background and thoughts on what may have been contributing factors to the "Crash of 87" let's take a look at the Dow Industrials during that time period.
Here's a point and figure chart of the Dow Industrials dating back to 1985 thru early 1991. Look what happened in just a very short period of time from 10/12/87 to 10/20/87. Think about those that may have taken a drastic last step, when all they worked for, had come to an end.
PnF Chart of INDU (1986-1990) at this Link
A 20% decline from current trade of 10,215 would have the INDU falling to 8,172. With some understanding of history and "key dates," I've marked those dates on the PnF chart of the INDU.
Current Analysis: Longer-term Treasury YIELDS are BELOW where they began the year. Nowhere near 10%! This week, I was monitoring our junk bond Pacholder High Yield (PHF) $8.89 +1.60% Link for bullish entry point as it's SEC YIELD ($0.075 dividend per month / $0.90 dividend per year) did equate to 10% intra-day on Thursday! The dollar has been gaining strength of late. Very different than that found leading up to, and during the Crash of 87. Now we have something to monitor for! (longer-term yield action relative to junk bond yield, as well as dollar action)
Now let's take a look at how the Dow Industrials (INDU) look today, and envision what a "Crash of 87," or "Black Monday" might look like if similar to October 1987.
Present day chart of the Dow Industrials at this Link
Analysis: The INDU has given two consecutive "sell signals" at 10,500 and 10,350. On Tuesday, a large block sell trade in shares of Exxon Mobil $55.37 near the $58.00 level helped see the INDU reverse from 10,450. First sign of "Crash 87" repeat would be a trade at 10,150 where trader would want to be monitoring YIELD action and DOLLAR action. Further weakness to 10,050 would be testing important 10,050 support. Here, program trading curbs would be triggered, and curbs would be put in place. It would then be a trade at 10,000 and a spread triple bottom sell signal (see October 1987 crash pattern recognition) that would be the likely alert to a "Crash of 1987" repeating.
After analyzing the "Crash of 1987" I would have to say it is highly unlikely that history should repeat on Monday. However, we now have a better idea of what to be alert to (YIELD action, Dollar action, INDU action).
Dow Diamonds (DIA) 102.14 Link (INDU = 10,215) November Option Chain found at this Link
Remember! The "Crash of 1987" was quick and lasted just a few days. There was great opportunity from not only the bear side, but the bull side!