How close is the US stock market to repeat 1987?

On October 19, 1987, the United States stock market fell the most in its entire history. The Dow Jones Index lost almost 23%. This event went down in history as “Black Monday”. For traders and investors, this event became a kind of guideline when the situation develops according to the scenario “there is nowhere worse”.

Formally, that Monday was not much different from any other day, that is, there was no super-event that would trigger that flash crash. The point is the general accumulated fatigue of the market, which has long been ready for it to breakthrough. And it burst through.

The US stock market now in its state is somewhat reminiscent of the one that was on the eve of Black Monday.

There are 4 key features of the US stock market in 1987:
1. The market has shown the strongest growth in recent years.
2. The market is euphoric.
3. Sharp drops in price dynamics became more frequent on the eve of “Black Monday”.
4. The negative effects of financial innovation.

If you look at what is happening today in the US stock market, then with one degree or another degree of confidence, you can check the box at 1, 2 and 4 points.

Point number 1. From the beginning of 1987 until August 1987, the Dow Jones Index soared 44%. At the same time, over the previous 5 years, it has grown by 265%.

The Dow soared 44% from the beginning of 1987 to its peak on August 25, 1987. The Standard & Poor's 500 Index rose 265% in the five years ending August 1987, suggesting reinvested dividends.

In 2019, the Nasdaq Index grew by 42%, while over the past 5 years, the growth exceeded 200%

As you can see, the situations are very similar.

Point number 2. Worse measurable. But in 1987, after decades of growth, it was believed that the stock market could only grow. To date, there are various metrics (for example, CNN's Fear and Greed Index) that allow you to quantify the level of greed in the stock market. So, by the end of 2019, the level of greed reached historic highs.

Point number 4. In 1987, one of the reasons for the flash crash was the automatic execution of stop losses, which provoked a panic wave and significantly increased its effectiveness.

The situation today looks many times more vulnerable. According to various estimates, up to 80% of transactions in the stock market are performed automatically (by computers).

The total for a full analogy is lacking only strong downward movements. On the eve of Black Monday in 1987, the US stock market lost 10%, depriving investors of confidence in themselves and the market and creating the prerequisites for a full-fledged panic. Given that over the past couple of sessions, stock markets have dipped 3-4%, it seems that the circle is closing.

Thus, the basic prerequisites have already been created. It remains to bring investors and traders to their senses and return them to the ground, and then a full correction will become inevitable.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to adjust. The scale of correction is from 50% and higher. Given that in recent years, shares of technology companies in the US stock market have grown by an average of 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will no doubt become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual issuers (Apple, Microsoft, Alphabet, Oracle, etc.).