In 1987, 33 years ago, the $SPX500 peaked in August on the 25th of the month right as Alan Greenspan took over at the Federal Reserve from the then greatest Paul Volcker who had navigated the US financial markets through the desperate Jimmy Carter inflation of the late 1970's and spiked rates up to the sky to stop inflation into 1980.
The stock market in 1987 was leveraged with stock index futures carrying just enough liquidity to drive UP prices with ease as institutional investors bought the entire index in one purchase instead of individually buying each stock in the 500 stock index. Back then the $OEX or $SPX100 was the more popular index, but stock index futures were created on the more diversified $SPX500 Index.
Rates were rising throughout 1987 as inflation picked up and as the Fed tightened. Inflation ran in the 7% area and 30 year Treasury rates lifted from 6% to 10% in the summer of 1987. 1988 was just ahead and capital gains tax rates were set to rise from 20% to 28% thanks to a move by Democrats to try to raise revenues after the devastating 20% interest rates and the recession into 1982 and tax cuts in 1986 to spur the economy out of the 20+ years sideways move. As soon as the market broke out of the 1000-500 range it was stuck in since 1960, the Gov't chose to tax the advance, even though "after inflation" there were no gains at all.
The reality of the structure of the market back then was that it was overbought and overleveraged AND the incentive to hold on was very low. 10% US Gov't Bonds and 7% inflation, after taxes meant there was very little return for holding bonds, but at 10% the return was equal to the long run S&P500 but without any risk since the US Gov't is viewed as the lowest risk investment in the world.
Notice what happened in 25% of the time of the advance from the launch higher in 1987 to the peak on August 25, 1987 - the market gave all of the advance back before rebuilding again.
We all want to point at someone and blame them for why this happened. There were plenty of reasons but it is good to look at the price structure and see how it was set up.
Wishing you all the best. Study the past so you can recognize the patterns. The past doesn't repeat exactly but people do respond to stressful situations in very similar ways. Look for stress to increase and you can be assured that people will repeat patterns.
Earlier this year the market was also repeating the 1987 structure and oddly enough it repeated into the CoronaVirus pandemic.
Tim West. 8/18/2020. 11:16AM EST
The stock market in 1987 was leveraged with stock index futures carrying just enough liquidity to drive UP prices with ease as institutional investors bought the entire index in one purchase instead of individually buying each stock in the 500 stock index. Back then the $OEX or $SPX100 was the more popular index, but stock index futures were created on the more diversified $SPX500 Index.
Rates were rising throughout 1987 as inflation picked up and as the Fed tightened. Inflation ran in the 7% area and 30 year Treasury rates lifted from 6% to 10% in the summer of 1987. 1988 was just ahead and capital gains tax rates were set to rise from 20% to 28% thanks to a move by Democrats to try to raise revenues after the devastating 20% interest rates and the recession into 1982 and tax cuts in 1986 to spur the economy out of the 20+ years sideways move. As soon as the market broke out of the 1000-500 range it was stuck in since 1960, the Gov't chose to tax the advance, even though "after inflation" there were no gains at all.
The reality of the structure of the market back then was that it was overbought and overleveraged AND the incentive to hold on was very low. 10% US Gov't Bonds and 7% inflation, after taxes meant there was very little return for holding bonds, but at 10% the return was equal to the long run S&P500 but without any risk since the US Gov't is viewed as the lowest risk investment in the world.
Notice what happened in 25% of the time of the advance from the launch higher in 1987 to the peak on August 25, 1987 - the market gave all of the advance back before rebuilding again.
We all want to point at someone and blame them for why this happened. There were plenty of reasons but it is good to look at the price structure and see how it was set up.
Wishing you all the best. Study the past so you can recognize the patterns. The past doesn't repeat exactly but people do respond to stressful situations in very similar ways. Look for stress to increase and you can be assured that people will repeat patterns.
Earlier this year the market was also repeating the 1987 structure and oddly enough it repeated into the CoronaVirus pandemic.
Tim West. 8/18/2020. 11:16AM EST
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Isn't it interesting that the $QQQ Nasdaq Composite has NEARLY THE EXACT SAME PATTERN AS THE $SPX500 had just prior to the crash in 1987...
It is almost identical...
Do we have enough bubble-euphoria and enough "stop losses" below the market to create a crash? Haven't we had enough micro-crashes since the Covid-Crash?
I'm not here to PREDICT the future, but what I can tell you is that there is a situation here where we are NEARLY EXACTLY repeating a pattern which set up JUST BEFORE THE CRASH OF 1987 and we should BE ON THE LOOKOUT for any signs that the event or something like it could happen again.
There is a TREMENDOUS AMOUNT OF MARGIN DEBT in the market at the moment, but WHAT WILL MAKE THEM SELL to reduce that margin debt? I don't know at the moment.
I can hash out all of the differences and similarities of THEN TO NOW and we could write a book about it.
For now... keep yourself in touch with any price weakness from this pattern because IT IMPLIES THERE ARE NOTHING BUT STOP LOSS ORDERS BELOW THE MARKET and all it takes is for a little price weakness to TRIP the first wave of stop loss orders.
Take it with a grain of salt or take it seriously. This ISN'T the first time I've pointed out this pattern - there was a similar one last year going into the pre-Covid peak and this pattern has taken many months to set up.
I'll be eager to read your questions and comments... and HOPE you can see the similarities...
Tim. 4/6/2021. 4:18PM EST