# Echoes of pre-crash of 1987



## Pluto (Sep 12, 2013)

My recollection of the 87 crash is it began in Asia, and worked its way around the world to New York and Toronto. Currently, trouble is brewing in the Orient. For example,

http://finance.yahoo.com/news/credi...-sell-hong-kong-luxury-211105500--sector.html

http://www.cnbc.com/id/101510142

Too, I notice that in the media, since the last dip, there is a shift in perspective about stocks. During the dip of Jan - Feb 2014, concern was rising as seen in articles warning of a crash. But now the markets recovered, happiness and complacency returns - just like pre-crash 87, when, it was claimed, stocks were the only game in town because *real estate was too high*. Back in 2014, the market rebounded from its dip and economic data released today pointed to an improving economy. All is well. This all is well sentiment is likely to fuel a deeper and broader euphoria based on the assumption that a good economy means higher and higher stock prices. Meanwhile the the trouble brewing in Asia is more or less in the background. Strange, especially since previously, the fabulous Asian economy was used to justify a painting a rosy future for North America. Now that China is weakening, the previous justification seems to be forgotten, even though, if it works one way, it should work the other. Too, the Value Line investment survey currently see a 30% appreciation potential for stocks in the next 3 to 5 years. At the last market bottom, the appreciation potential was 185%. Hmmmmm. I suspect we are in for a surprise. Question is, when? 

I suppose I could be accused of trying to time the market, something that, in the current prevalent paradigm, is a no no. Even so, I say this is a a risky time for stocks. In an over valued market such as this, the cut off point is when the major indexes fall below the 270 day simple moving average. The 270 day ma, more or less, separates a bull market from a bear, especially when heading lower in an over valued market. 

This post is only for those who are interested. It isn't for those who, for what ever reason don't care about market direction and valuations.


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## Nemo2 (Mar 1, 2012)

> Question is, when?


I ask myself this practically every day......always waiting for the third shoe to drop.


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## andrewf (Mar 1, 2010)

US is ripe for a bit of a correction. 30% would not surprise me. The rest of the world is actually not unreasonably valued, though that isn't to say it can't get cheaper.


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## cainvest (May 1, 2013)

A 30% correction wouldn't surprise me either, neither would a 20% gain for 2014.


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## PatInTheHat (May 7, 2012)

cainvest said:


> A 30% correction wouldn't surprise me either, neither would a 20% gain for 2014.


This is really the problem.


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## andrewf (Mar 1, 2010)

20% gain would bring US CAPE from ~25 to 30. Possible, but valuations would be quite stretched then.


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## Woz (Sep 5, 2013)

A high CAPE usually indicates reduced returns in the next 5-10 years. It's difficult to use it to try and predict what the market will do in the next year.


The S&P CAPE has been between 24 and 26 for 43 months since 1871 (excluding the past year)
Of those 43 months, the return in the next year has been an average of 9.7% and a of median 13.2%
Of those 43 months, the return in the next year has been greater than 20% thirty percent of the time.
Of those 43 months, the return in the next year has been less than 0% twenty-one percent of the time.
Of those 43 months, the highest return in the next year was 46% between July 1996 and July 1997.
Of those 43 months, the lowest return in the next year was 39% between December 2007 and December 2008.


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## humble_pie (Jun 7, 2009)

Pluto said:


> My recollection of the 87 crash is it began in Asia, and worked its way around the world to New York and Toronto


i believe that was the crash of '98. Started with the thai baht. 1987 was pandemic, global. Both were dwarfed by the crash of 2008/09.


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## cainvest (May 1, 2013)

andrewf said:


> 20% gain would bring US CAPE from ~25 to 30. Possible, but valuations would be quite stretched then.


If the chart I'm looking at is correct it's been above 25 for most of 1996-2008 and above 30 from about 1998 - 2002 ... it's doable.


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## Rusty O'Toole (Feb 1, 2012)

This thread reminds me of a story I think comes from one of Jack Swager's Market Wizards books. One of his market wizards, a commodity trader, told him this story. He had a large position in corn on which he had large gains. He was worried about when to sell. One night, in a dream, he found himself in a cave talking to a wise old man. The wise man offered to answer any question he had. The question he asked was, "when should I sell my corn?".

The wise old man said, "How high do you think it will go?" he answered, " $2.24 or $2.25" "Where did it close yesterday?" " $2.16" " And you haven't started selling? Are you crazy?"

With that he sat straight up in bed thinking "am I crazy?"

Next morning he went to the office worried that corn was going to hell but it opened at $2.18. He sold 50 contracts right away, then another 50. The market kept going up. When the market took them without dropping or hesitating, he sold 100 and kept on selling. By 10 AM he didn't own any corn.

Not long after 10 a friend called and said "was that you selling all the corn this morning?" "Yes" "Why? what did you hear" "How high do you think it is going to go?" " $2.25 or $2.30" " And how high is it now?" He didn't even get an answer, just a dial tone as his friend hung up and started dialing his broker.


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## andrewf (Mar 1, 2010)

cainvest said:


> If the chart I'm looking at is correct it's been above 25 for most of 1996-2008 and above 30 from about 1998 - 2002 ... it's doable.


Yes. Possible, but not likely. 2001 was the largest bubble in US history.


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## blin10 (Jun 27, 2011)

thing is, markets can go up another 20% and then have 20% correction which will bring you to today's price... who knows


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## fatcat (Nov 11, 2009)

for a large correction to happen, people need to be taking their money out of the market, correct, that's what a correction is, people sell and there are few buyers ?

generally investors think in terms of "where do i put my money to get the best return based on my risk tolerance" ?
so where are all these people going to place their cash if they decide to pull it out of the us equity market ?

where can money be made if not in the equity market ?
don't we have a world full of shaky economies and risky sovereign bonds ?

isn't the us dollar the flight to safety ?
why then would the us equity market correct 30%

housing is improving, the labor market is improving and corporations have plenty of cash 

are we just talking about pure panic here or what ?


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## Pluto (Sep 12, 2013)

humble_pie said:


> i believe that was the crash of '98. Started with the thai baht. 1987 was pandemic, global. Both were dwarfed by the crash of 2008/09.


Yes, '98 too. Another Asian financial crisis, now that you mention it. In 87 it was Japanese stocks.


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## Pluto (Sep 12, 2013)

fatcat said:


> for a large correction to happen, people need to be taking their money out of the market, correct, that's what a correction is, people sell and there are few buyers ?
> 
> generally investors think in terms of "where do i put my money to get the best return based on my risk tolerance" ?
> so where are all these people going to place their cash if they decide to pull it out of the us equity market ?
> ...


No, it isn't panic. That is to come. You mention good things about the economy and companies. Markets top out and crash when the economy is good. A good economy is bad for stocks. 

Where would people put their money if they decide to sell equities? Short bonds - XSB. Then buy stocks back. However, it is a personal decision. Lots of people are apparently happy riding it down, and up the other side. It works provided one holds strong companies.


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## Pluto (Sep 12, 2013)

cainvest said:


> A 30% correction wouldn't surprise me either, neither would a 20% gain for 2014.


Good point. That's why the 270 day ma rule. Even though the market may be over valued, and it could stay over valued for years, as long as the market stays above the 270 day ma, the strategy is to hang on. That way, one can ride the wave of optimism and euphoria, instead of selling out, and then seeing an over valued market continue up for a long time.


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## braintootired (Nov 4, 2013)

There doesn't have to be a 30% correction. The market could just plateau for a while.


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## Rusty O'Toole (Feb 1, 2012)

"for a large correction to happen, people need to be taking their money out of the market, correct, that's what a correction is, people sell and there are few buyers ?"

Correct but out of date. Since the 30s governments have been fine tuning their economies by various economic and fiscal policies. The US Federal Reserve has pursued a policy of "quantitative easing" since 2009, pumping $85 billion a month into the financial markets. A few months ago they began "tapering". They have not stopped QE but they cut it back by $10 billion.

This must result in a slow down or drop in financial markets. How much and how fast, who knows? But to bet on markets continuing to go up after a 5 year uninterrupted boom, when the Fed is deliberately trying to slow it down, seems incautious to me.


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## fatcat (Nov 11, 2009)

Rusty O'Toole said:


> "for a large correction to happen, people need to be taking their money out of the market, correct, that's what a correction is, people sell and there are few buyers ?"
> 
> Correct but out of date. Since the 30s governments have been fine tuning their economies by various economic and fiscal policies. The US Federal Reserve has pursued a policy of "quantitative easing" since 2009, pumping $85 billion a month into the financial markets. A few months ago they began "tapering". They have not stopped QE but they cut it back by $10 billion.
> 
> This must result in a slow down or drop in financial markets. How much and how fast, who knows? But to bet on markets continuing to go up after a 5 year uninterrupted boom, when the Fed is deliberately trying to slow it down, seems incautious to me.


you are losing me, you say the "the Fed is deliberately trying to slow it down" ... do you mean the market ? because the fed is doing anything but try to slow down the market, it is trying to support the market by forcing people into riskier assets ... at the same time it is trying to keep interest rates down to make servicing the debt easier

the fed is mainly trying everything it can to stop rampant deflation

this market may go up for 5 more years, the mere fact that is hasn't done this (or anything else) before says nothing about what it will do in the future

it's possible that the fed has managed this perfectly and we will (and are) seeing gradual signs of a return to growth in the us economy, it may be slow and steady which i why i like owning assets that pay me money regularly

as far as predicting a crash, of course there will be correction and crashes, that's why we must put a goodly chunk of our money in bonds and bond equivalents

but trying to predict them has so far proven impossible with any degree of specificity, except for the perma-bears who eventually will be proven correct but miss the entire run up in the meantime


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## james4beach (Nov 15, 2012)

If you look at charts leading up to the '87 crash, the market weakened significantly and was in a declining trend before the actual crash. Similarly in 2008, the market didn't just crash one day: there was technical weakness in broad indices for about a year preceding it.

Even leading up to 9/11/2001, you'll see the market was very technically weak in the preceding months. Yes 9/11 induced a crash BUT the market was already weak.

The conclusion I come to is that market crashes don't happen out of the blue. There is a prerequisite of weak technical conditions before a crash happens... and that doesn't exist today, not in the S&P 500 or TSX.

On the other hand, China, Japan, emerging markets and BRICs have been weak for quite a while now


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## Pluto (Sep 12, 2013)

james4beach said:


> If you look at charts leading up to the '87 crash, the market weakened significantly and was in a declining trend before the actual crash. Similarly in 2008, the market didn't just crash one day: there was technical weakness in broad indices for about a year preceding it.
> 
> Even leading up to 9/11/2001, you'll see the market was very technically weak in the preceding months. Yes 9/11 induced a crash BUT the market was already weak.
> 
> ...


I'd be interested to know what technical weakness for a year, 87 era, you are referring to. Not saying you are mistaken, just would like to know. In present times, the Fosback Hi-Lo indicator triggered last year. (It is not one I pay a lot of attention to, though.) On the matter of coming out of the blue - for many, perhaps most, they come out of the blue. Part of the reason is they don't pay attention to signs of increasing risk. Another part is they assume an improving economy is good for stocks. 

The theme of predicting a crash: that's easy. We know for a fact that markets and the economy go in cycles, so we know there will be a bear market. 
Then we have the theme of predicting with precision: That's a problem. For myself I don't try to predict with precision, as apparently, it isn't doable in a regular, and reliable manner. I do however try to identify a crash shortly after it begins, and have a plan in place for what to do, if anything. But in order to be more precise its a matter of identifying times when the risk is high. That's why I look at appreciation potential. If that is low, then the risk is high. This method helps with the precision issue, even if it doesn't nail down a specific time in advance. 

It wouldn't surprise me, however, if we have seen the high in the S&P for this cycle. The caveat is that the US economy isn't as good a s it usually is before the market tanks. Unemployment isn't low enough, manufacturing isn't at nosebleed levels. So, as many have stated - who knows when? Nobody, that I know. That's why I use the 270 day ma: When the market is over valued, and the index's cross below it, we know it is a serious down trend.


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## cainvest (May 1, 2013)

Pluto said:


> That's why I use the 270 day ma: When the market is over valued, and the index's cross below it, we know it is a serious down trend.


This has happened a number of times since 2010 with no serious down trend.


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## james4beach (Nov 15, 2012)

Pluto said:


> I'd be interested to know what technical weakness for a year, 87 era, you are referring to.


I didn't say there was a year of weakness leading to '87. That one happened pretty fast (unlike 2000 and 2008)

Still, there was some warning I think. Now that I look at the charts, I see it was not much warning (certainly nothing like 2000 or 2008). I see 6 trading days of nearly straight declines before the '87 crash. A bigger alarm bell would be two days below the 200 day moving average on rapidly increasing volume

http://stockcharts.com/h-sc/ui?s=$INDU&p=D&st=1987-07-01&en=1988-01-01&id=p04930741216

Another trigger/warning sign was the rapid increase in interest rates as you can see on the 10 year chart ($TNX into the above URL). The sharp increase in bond yields happened immediately before the '87 crash

But yeah, not much warning


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## james4beach (Nov 15, 2012)

To clarify my statement on interest rates. What the rapid rise in yields shows is that *bonds began crashing before the start market*. Very often, credit market events precede stock market events. This is exactly what happened in 2007 too, when bonds (various forms of credit) were crashing more than a year before the stock market.

In fact, bond prices were plummeting for 8 full months before the '87 crash.

Today however: no stock market weakness; no bond market weakness.

The day will come when credit markets begin plummeting again (it will probably start in junk credit and spread into other corps) but until that comes, I don't see anything imminent happening


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## sags (May 15, 2010)

Strictly anecdotal.......and non statistical, non technical observation............but............

I have noticed that the auto manufacturers seem to be a good indicator of looming troubles in the economy and the stock markets.

They are among the first to feel a "tightening" among consumers and a slowing economy, which compels them to support production levels and move inventory by offering ever increasing "incentives" such as cash backs, 0% interest rates, longer mortgage terms........and the most compelling evidence....... lowering of credit scores requirements to qualify buyers.

Currently, the auto manufacturers are offering......cash back incentives, 0% interest for 84 months, and have lowered credit requirements down into the "subprime" zone of credit scores. Some of them are also offering 2 years free oil changes and a 40 cent a liter off cash card.

A couple of recent newspaper accounts...........

One was a mentally challenged woman, whose only income was a small disability pension, going into a dealership and buying 2 cars in the same day. She was approved for both loans and her family had to fight to get the cars returned.

Another story was from a car salesman who said he had a person come in and he "knew" she wouldn't get approved after she told him her financial history and current circumstances. He sent in the contract anyways and much to his surprise it was approved. He wondered how she could ever make the payments.

This movie played before.........just before the big recession.

They are doing everything but giving the cars away right now.

Maybe it is a warning sign..............or maybe not.

Cars are kind of unique though...........as they are dated and even brand new ones become worth less over time.


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## fatcat (Nov 11, 2009)

the market specializes in odd and interesting events and it kicks them out on a regular basis and will do so forever
except they tells us nothing about what will happen in the future

the amount of variables affecting the stock market is for all intents ... infinite

predicting crashes amounts to predicting the future and nobody does that well

looking backward, it always seems so clear and obvious (as any good astrologer will tell you)
looking forward is a crap shoot and says 100 times more about your personal biases than it does anything about the markets


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## Pluto (Sep 12, 2013)

cainvest said:


> This has happened a number of times since 2010 with no serious down trend.


I'm not sure what it is that has happened a number of times. 

What I am talking about is
1. Total market cap is > GNP/GDP, *and*
2. A drop in the S&P below the 270 day ma. 

Drops below the ma are ignored if condition 1. is not met. 

So since 2010 there hasn't been any time where both conditions were met. About June 2013 market cap exceeded GNP/GDP, so condition 1. has been met. Condition 2 has not been met. The last time both conditions were met was about Dec 31 2007.


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## Pluto (Sep 12, 2013)

fatcat said:


> the market specializes in odd and interesting events and it kicks them out on a regular basis and will do so forever
> except they tells us nothing about what will happen in the future
> 
> the amount of variables affecting the stock market is for all intents ... infinite
> ...


The reason why most people are mistaken is because the predict the future by looking in the rear view mirror. Then they say it is impossible to predict the future. They need to stop assuming that what happened last year must happen this year. Anyway, my perspective is, when total market cap > GNP/GDP the next time the S&P drops below the 270 ma, it is a serious downtrend. 

I realize there is a prevalent paradigm these days that that it is impossible to predict anything about a group of stocks, or even a single stock. I wonder why anyone who believes that buys them, for anyone who goes long stocks is does so based on the belief they will go up, or at least, stay the same and pay a dividend. Implicitly, anyone who buys stock is predicting some profit, which usually means going up. 

If they really believed they couldn't predict, they wouldn't buy, and they surely wouldn't buy a stock if they believed it would go down. So every time they buy, they are predicting. 

fatcat, I assume you buy stock. and if you do, your act of buying is an implicit prediction that you will get a profit. So, if you buy stock, you predict too. 

In any case, the sell signal I use was triggered twice since 2000. Both times terrible down trends occurred. So I'm sticking with it. I really don't pay much attention to the idea that it can't be done.


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## Pluto (Sep 12, 2013)

james4beach said:


> To clarify my statement on interest rates. What the rapid rise in yields shows is that *bonds began crashing before the start market*. Very often, credit market events precede stock market events. This is exactly what happened in 2007 too, when bonds (various forms of credit) were crashing more than a year before the stock market.
> 
> In fact, bond prices were plummeting for 8 full months before the '87 crash.
> 
> ...


The US 10 year bond yield has gone up since last year, so presumable those bond prices went down. Canadian RIET etf's topped out about last April, and have been drifting more or less down since then - they did the same thing pre- 2008 crash. What about utility stocks - are their prices drifting down, and yields going up? If so, that's another sign. But these are leading indications, and often a long time ahead. Buy the time the market tanks, they have been forgotten. For instance, the 10 year Bond, and the RIETS, and some utilities reacted last year all at the same time, and people noticed and talked about it then, but it seems to be mostly forgotten.


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## Pluto (Sep 12, 2013)

sags said:


> Strictly anecdotal.......and non statistical, non technical observation............but............
> 
> I have noticed that the auto manufacturers seem to be a good indicator of looming troubles in the economy and the stock markets.
> 
> ...


I'm keeping this in mind - good anecdotes. Alludes to the US mortgage approvals when no application was turned down, and then the real estate crash. Suggests 1. easy money 2. bubble, 3. pop.


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## livewell (Dec 1, 2013)

Pluto said:


> I'm not sure what it is that has happened a number of times.
> 
> What I am talking about is
> 1. Total market cap is > GNP/GDP, *and*
> ...


Where do you get the data for tracking market cap vs GDP/GNP? (I assume GNP/GDP is US based yes?)


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## Pluto (Sep 12, 2013)

livewell said:


> Where do you get the data for tracking market cap vs GDP/GNP? (I assume GNP/GDP is US based yes?)


Yes, it is US data. But I use it for Canadian markets too based on the assumption we are not insulated from them. 

I adopted the 270 day ma a long time ago as a ma that more or less separated bull markets from bear markets. The annoying thing was "more or less", as it generated a few false signals. Then I noticed that the false sell signals did not occur if the market was over valued, and that adding the Valuation criteria eliminated most of the false signals. The link below is one of many places you can get the information. 

Presently, we are over valued. But we have not met condition 2. The next time the indexes fall below the 270 day ma, look out below. 
Part of the problem with warnings that the market is over valued is, they can stay over valued for years. so it doesn't tell people when to get out. And as mentioned, the ma by itself generates a few false signals. When the two indicators are combined, they work well (for me). (This is only for people who like to preserve capital. It is not for people who are willing to hold through thick and thin). 

http://www.gurufocus.com/stock-market-valuations.php


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## Rusty O'Toole (Feb 1, 2012)

fatcat said:


> you are losing me, you say the "the Fed is deliberately trying to slow it down" ... do you mean the market ? because the fed is doing anything but try to slow down the market, it is trying to support the market by forcing people into riskier assets ... at the same time it is trying to keep interest rates down to make servicing the debt easier
> 
> the fed is mainly trying everything it can to stop rampant deflation
> 
> ...


Are you retarded? What are we talking about? The Fed's Quantitative Easing program involves buying $85 billion of bonds each month. They recently announced that they are "tapering" QE by $10 billion a month, from $85 billion to $75 billion. 

Now, what do you think they are "slowing down?". Think hard.

Answer: They are slowing down Quantitative Easing, in other words, they are slowing down the pace at which they buy bonds.

Now we get to the really hard part. They have been doing the Quantitative Easing to stimulate the economy but the main stimulus has been to the stock market, because the financial institutions that sold them the bonds, have put the money into the stock market.

Let us put on our thinking caps. If the Fed has been putting $85 billion a month into the stock market for the past 5 years, and the stock market has gone up steadily for 5 years, and now they are "tapering", what does that mean for the stock market?

My guess is, the stock market will not go up as fast, in fact it might even go down a little. What is your guess?

You say "the fed is doing anything but try to slow down the market, it is trying to support the market by forcing people into riskier assets ... at the same time it is trying to keep interest rates down to make servicing the debt easier". This is correct, except that they are now "tapering" the support. Hoping that they can slowly and gradually remove the support without causing a crash, before they cause rampant inflation.

I'm not saying this will make the markets go down but I'm damned if I see how it can make them go up.


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