October 19th, 2012

Echo of the 1987 Crash

It was twenty-five years ago but it still seems like it was only yesterday.  I didn’t have much money in the market during the ’87 Crash but it was all the money I had saved.  It was a time when it wasn’t as easy as it is now to get up-to-the-minute stock market news and quotes.  It was before the Internet and CNBC so the only way of obtaining that information was either by calling your broker, listening to radio news or waiting for the evening newspapers.

Nevertheless, we some how found out that the market was in free fall.  I somehow got hourly updates and remember running down to my bosses office to update him on what I had learned.  He had much more invested than I and his face was ashen.  By the end of the day, we finally learned that the market had closed down 22.6%, it’s largest ever one-day decline.  All we could do was just pace back and forth in his office, wondering whether we we witnessing the “end of the economy”.

Today is the anniversary of that one-day crash.  And today, we’re experience an echo decline triggered primarily by Google’s announcement about a shortfall from expectations based on disappointing results of their advertising business due to a shift away from desktop to mobile computing and internet access.  In 1987, the focus was on the newly introduced PC’s and what was anticipated to be a revolutionary implication on traditional business.  Twenty-five years later, we see that the world has been markedly been impacted.

As I note in my book, Run with the Herd, the market has suffered through 10 bear markets since WWII and discusses in detail the 4 during the last 40 years.  But one of the best ways of putting the crash into perspective is to read some of the comments of key players in 1987 (these quotes are from my book):

  • “Technically, the crash of 1987 bears an uncanny resemblance to the crash of 1929. The shape and extent of the decline and even the day-to-day movements of stock prices track very closely.” – George Soros in “The Alchemy of Finance”
  • “The market crash of 1987 caught most economists, scholars, and investment professionals by surprise. Nowhere in the classical, equilibrium-based view of the market so long considered inviolate was there anything that would predict or even describe the events of 1987.” – Robert Hagstrom in “Investing, the Last Liberal Art”
  • “The President [Ronald Reagan] has watched today with concern the continued drop in the stock market….consultations confirm our view that the underlying economy remains sound.  We are in the longest peacetime expansion in history.  Employment is at the highest level ever.  Manufacturing output is up. The trade deficit, when adjusted for changes in currencies, is steadily improving. And, as the chairman of the Federal Reserve has recently stated, there is no evidence of a resurgence of inflation in the United States.” – White House Statement released on October 19, 1987
  • “I have never experienced anything like this, so it is difficult to have clear vision. I don’t understand it in terms of the fundamentals of the economy” – Robert Allen, president of AT&T, October 20, 1987
  • “The borrowing has to stop. The market slide was a shot right between the eyes that had better wake us all up to simple fact that we can’t keep romping forever on borrowed money.”  – Lee Iacocca, Chrysler Corp Chairman, October 20, 1987
  • “It’s the nearest thing to a meltdown that I ever want to see. We were fortunate this occurred when the American economy is very stong.” – John J. Phelan, Chairman of the NYSE, October 20, 1987
  • “They should bar buying and selling by programming. They can’t stop the selling once it gets going, it’s just computers selling to computers. It became a gamble, not an investment anymore. All those guys with 65 credit cards and Porsches who think they are all geniuses at 25 – now see what’s happened.” – Alexander Kopelman, 80 year old Florida man, October 20, 1987
  • “I told my clients that it was a sucker’s market (two days after the crash). A week ago, I would have taken a gamble on anything that looked promising when I was dealing for my own account or for some of my family members. I had been spoiled by the bull market, I never knew anything else. But I became a cynic and a skeptic in a hurry.” – A broker, October 23, 1987
  • “I will tell you that, prior to the opening of the market, Mr. Phelan (Chairman of the NYSE) and I had a conversation where he advised me that there was an inordinate number – “unbelievable” I think was his word – of sell orders coming into their market. That was like an hour before their opening on Monday. So we saw it coming, but who knows who pushed the button to make it happen.  I think that button was pushed a million times by a million people.” – Leo Melamed, chairman of the Chicago Mercantile Exchange, October 28, 1987
  • “Investors had expectations before the 1987 crash that something like a 1929 crash was a possibility, and comparisons with 1929 were an integral part of the phenomenon. It would be wrong to think that the crash could be understood without reference to the expectations engendered by this historical comparison. In a sense many people were playing out an event again that they knew well.” – Economist Robert Shiller
  • ” So improbable is such an event that it would not be anticipated to occur even if the stock market were to last for 20 billion years, the upper end of the currently estimated duration of the universe. Indeed, such an event should not occur even if the stock market were to enjoy a rebirth for 20 billion years in each of 20 billion big bangs.” – Mark Rubinstein, economist in “Comments on the 1987 Stock Market Crash: Eleven Years Later”
  • “Those who thought Black Monday on 1987 was the most frightening day of their lives are forgetting those first few hours of Terrible Tuesday, when the market as we know it simply ceased to exist…. In fact, the dirty little secret of that Tuesday morning is that the screens simply weren’t functioning. It was like the Wild West out there. Anything you tried to buy simply went up ahead of you until you caught it and then it would come down so fast that you could lose hundreds of thousands of dollars in mere seconds. I retreated to the sidelines rather than endure that kind of punishment.” – James J. Cramer, founder of theStreet.com and CNBC personality

Some of these personalities are still around.  It would be interesting to know both their view of the 1987 crash from today’s perspective and their view of today’s sell-off due to what today’s talking heads call the death of desktop computing and click advertising.

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October 10th, 2012

Assessing Market Opportunities and Risks

It’s been some time since I last posted because, well, because there wasn’t much new or much positive to write about.  As a matter of fact, the last time I wrote about the market was on August 29 in “Every Trading Range Is Not a Reversal Top“; the market is a mere 1.56% above the level at that close.

I pretty much fully invested now; I like most of the stocks I own since I’ve been cleaning house as this bull run has progressed.  There are a ton of stocks that look like they, along with the over-all market are struggling to clear an intermediate sort of resistance level (the market Index may actually be stuck in the claws of a tiny “buyers’ remorse” correction after having barely crossed above that resistance at 1420-1425.

One must always evaluate the market in two ways : what are the upside opportunities and what sort of downside reversal risks are there.  When I step back today from the market’s day-to-day noise, I see upside potential to the 1567 all-time high level.  However, I also see what I hope will be only short-term obstacles.

My longer-term optimism comes from the fact that the market has steadily crawled up the lower boundary of an ascending channel emanating from last year’s low connecting with this year’s March low.  The parallel upper boundary of the channel conforms nicely.

Furthermore, this spring’s correction can be interpreted as a flag pattern.  Traditional chart reading rules of thumb suggest that the consolidation pattern will be approximately midway between the trough of the channel and the peak.  If that turned out to be true, then the peak should be somewhere in the 1600 area (1410/1125*1280), or not far from the all-time high.

The fly in that ointment is volume which just doesn’t seem to be cooperating so far.  Since 2011, the 50-dma of daily volume of the S&P 500 stocks has been trending lower (with the exception of last summer’s correction).  Even more ominous is the divergence that’s emerged between the Index levels and the on-balance-volume.  For those who need a refresher, OBV is Joseph Granville’s indicator in which volumes on up days are added and volumes on down days are subtracted from a rolling total.  A declining OBV indicates that volume on days when the market closes lower tend to exceed the volume on days when the market rises.  A divergence indicates that a rising market isn’t supported by adequate volume.

There’s sufficient cash on the sidelines waiting to be put to work and fixed income with it’s low rates isn’t the place to put it anymore.  ZeroHedge had an interesting piece this morning entitled “Are Businesses Quietly Preparing For A Financial Apocalypse?” about all the cash sitting on corporate balance sheets.  If the uncertainty coming from Presidential Election, Fiscal Cliff and continuing Eurozone saga then a good chunk of that money, both investor and corporate, could come into the stock market and make up for the volume drought.

While prices haven’t indicated a reversal process emerging yet, there sure are a lot of risks out there, both fundamentally and technically.

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