Does 1987 Have Any Lessons For Today?

Submitted by Christian Gustafson via Deflationland blog,

I think it does.  Well, I think, you know what I think, the usual speculative nightmarish scenarios, the usual apocalyptic distractions on the internet. 

But this one is novel, because it's based on an analysis of the 1987 (the year, not an S&P 500 level) crash.  Well, what happened in 1987?

We had a decline off a significant high, followed by a bear-bull battle off that initial low.  The low held a second time, with a deeper retrace back up, before we got our famous crash, a true waterfall.

It's a clear A-B-C move in my book.

Chart1: 1987 S&P 500

I was 16 and a Senior in high school when this went down.

So let's apply the 1987 idea to today, see if it suggests anything interesting.  We are currently in the process of finishing up a very long-in-tooth ending-diagonal 5th wave rally off the October 2014 lows at 1820 SPX.

When an ending-diagonal finally breaks down, we get a rapid sell-off straight back to the point of origin, 1820 SPX.  For a 1987 scenario, the speed and slope of this decline is our first critical piece of information, as it gives us the final target for the catastrophic "C" wave collapse.

The second critical bit of information is then how long the fight off the initial low -- 1820 SPX -- lasts before a final crisis.  Why is this important?  The fight over support and resistance levels creates a delay ... which only makes the ultimate target for "C" go lower and lower, into the depths.

So, you want a crash, one for the history books, one that removes all doubts about the future we have already consumed?  Look to October.

Chart 2: The 1987 Crash applied to today

The vertical lines on the chart mark various cycle turn dates of interest to me along the way.

I'll propose a sequence of events for how this plays out.

1. The Greece problem gets resolved in the short-to-medium term.  We are not talking about huge sums of money needed, as well as just enough "austerity" to dissuade the other worthless grifter Mediterranean EU states from asking for their gibs and gravy, to kick this can. 
2. The market tops in two weeks, on the release of the June FOMC Minutes, at 2150 SPX.  Fed members feel cheap and used and are generally pissed-off at this point, so they are screaming for hikes and "normalizing" rates.
3. The market breaks wedge support and sells off to 1820 SPX.  This is the long-awaited "correction", and it is bought.
4. We rally halfway-back to 1985 SPX into late August.
5. The 2nd estimate of Q2 GDP is released, and it is negative, meaning an official recession.
6. The market returns to 1820 SPX on this grim news, and the knowledge that the used-and-abused Fed is really, seriously-this-time-guys going to hike rates at the September meeting.
7. We sit right on critical support, 1820 SPX, into the September FOMC.  The market calls their bluff in the most sick and insidious way.
8. The Fed blinks, cites the recessionary GDP, and does not deliver the hike they had promised.
9. The market rallies hard, Shemitah shorts are eaten alive, to a higher level than late-August.
10. The S&P 500 gets back above the 2000 level, but fails to retake the old rally channel.
11. October.  Something breaks (bonds? yes, probably) and the Fed can do nothing but watch.  We are still at ZIRP and they have no ammo, nothing.  Fear and loathing grip the land!
     
12. If the 1987 model holds, now we seek out the target defined by (1) the slope of (A) down, and (2) the delay produced by the fight during (B).
13. Yes, it could go truly vertical, return us all the way back to the trendline between the 2002 and 2009 lows.  This would be an epic finish to Dr. Bob McHugh's "Jaws of Death" pattern.

 
An objection would be that 1987 only took 36% off the indexes, while what I am proposing here is a 74% crash, pretty much all at once.  It would blow through any support levels that seem reasonable -- 1500, 1100, 1040, etc. -- in a violent orgy of panic selling -- day after day after day.

I only want to suggest that something like this is possible, based on the geometry and logic of the 1987 episode, a true vertical collapse.

I mean, this is just foolishness, right?  We have recovery, and the markets are real, and the Baby Boomers are going to get paid.  Sure they are.

Chart 3: The Un-Possible True Crash For The Ages

No one gets out of this alive.

Comments

[Soul Glow]

Yeah - don't be stupid.

[Headbanger]

IT'S FUCKING AWESOME!

BUT MOAR LIKE 84% CORRECTION..

Just cause it's two times FORTY TWO!!!!

[Model T]

I made a lot of money off the crash in 1987; but then I understand what the fuck is going on.

[Little Doll]

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... http://bit.ly/1LCjofJ

[OneTinTrooper]

A 74% crash is not in the cards

[RaceToTheBottom]

Agreed, it goes down at least 75%

[Dewey Cheatum Howe]

75% or 100% on the high side.

[Usurious]

kool...........I always said that 666 should be tested..........

http://trendandvalue.blogspot.com/2008/11/666-s-500-and-13-year-cycle.html

[christiangustafson]

Nice work!

Saturday, November 8, 2008 666 - S&P 500 and the 13 Year Cycle

in 2002 the S&P 500 index bottomed at 777. in 2009 the index will hit 666. if not exactly, pretty close. below 700 anyway. I think.

[Harbourcity]

That chart gave me an erection.

[MsCreant]

BTMFD?

[nuvolari]

560 this fall. why not 0?? only retared person could write this.

[umdesch4]

"only retared person could write this."

Oh, the irony.

[christiangustafson]

Why did 1987 stop at the trendline?  Because it was there.

[max2205]

PPT hit the ask hard for a week

[Uber Vandal]

If this article were written about oil at this time last year when oil was at about $100, and then it dropped to the 40's in a rather short amount of time, crushing many of the tar sand companies such as PWE; many would have felt that such an article was foolish too.

[VelvetHog]

Let  'er buck!

[Incubus]

https://www.youtube.com/watch?v=5mbHHgLOV2U

: ) :) :)  :) :) :) X) X| X( XP

[SHsparx]

I wonder if market manipulation is in his equation?

[BI2]

There's a thread to all this chaos.

https://biblicisminstitute.wordpress.com/2015/06/25/warmongering-vs-econ...

[theFNG]

It won't go to 0 with all the 401k's unable to escape quickly.

[Racer]

But there was no PPT around in 1987, it was set up afterwards

[buzzsaw99]

agreud. the lesson of 1987 is that THERE IS A FED EQUITY MARKET PUT!!

[Uber Vandal]

Actually, the PPT has been around since the 1920's.

http://xroads.virginia.edu/~HYPER/ALLEN/ch13.html

A few minutes after noon, some of the more alert members of a crowd which had collected on the street outside the Stock Exchange, expecting they knew not what, recognized Charles E. Mitchell, erstwhile defender of the bull market, slipping quietly into the offices of J. P. Morgan & Company on the opposite corner. It was scarcely more than nine years since the House of Morgan had been pitted with the shrapnel-fire of the Wall Street explosion; now its occupants faced a different sort of calamity equally near at hand. Mr. Mitchell was followed shortly by Albert H. Wiggin, head of the Chase National Bank, William Potter, head of the Guaranty Trust Company; and Seward Prosser, head of the Bankers Trust Company. They had come to confer with Thomas W. Lamont of the Morgan firm. In the space of a few minutes these five men, with George F. Baker, Jr., of the First National Bank, agreed in behalf of their respective institutions to put up forty millions apiece to shore up the stock market.

The bankers separated. Mr. Lamont faced a gathering of reporters in the Morgan offices. His face was grave, but his words were soothing. His first sentence alone was one of the most remarkable understatements of all time. "There has been a little distress selling on the Stock Exchange," said he, "and we have held a meeting of the heads of several financial institutions to discuss the situation. We have found that there are no houses in difficulty and reports from brokers indicate that margins are being maintained satisfactorily." He went on to explain that what had happened was due to a "technical condition of the market" rather than to any fundamental cause.

As the news that the bankers were meeting circulated on the floor of the Exchange, prices began to steady. Soon a brisk rally set in. Steel jumped back to the level at which it had opened that morning. But the bankers bad more to offer the dying bull market than a Morgan partner's best bedside manner.

At about half-past one o'clock Richard Whitney, vice-president of the Exchange who usually acted as floor broker for the Morgan interests, went into the "steel crowd" and put in a bid of 205 -- the price of the last previous sale -- for 10,000 shares of Steel. He bought only 200 shares and left the remainder of the order with the specialist. Mr. Whitney then went to various other points on the floor, and offered the price of the last previous sale for 10,000 shares of each of fifteen or twenty other stocks, reporting what was sold to him at that price and leaving the remainder of the order with the specialist. In short the space of a few minutes Mr. Whitney offered to purchase something in the neighborhood of twenty or thirty million dollars' worth of stock. Purchases of this magnitude are not undertaken by Tom, Dick, and Harry; it was clear Mr. Whitney represented the bankers' pool.

The desperate remedy worked. The semblance of confidence returned. Prices held steady for a while; and though many of them slid off once more in the final hour, the net results for the day might well have been worse. Steel actually closed two points higher than on Wednesday, and the net losses of most of the other leading securities amounted to less than ten points apiece for the whole day's trading.

[the grateful un...]

87 turned out to be a faux crash. ghwb then VP pledged government backed liquidity to the NYSE, the Presidents Working Group on the Finanical Markets was formed, and we were off the races. the PPT was created, the activist FED made every emergency clause in their charter a matter of policy, and the markets have continued to levitate. the problem is this time there is no genie to bring out of the bottle. the deficits have grown larger, the pledge of liquidity has distorted the markets. for those who believe they will just come up with an even bigger magic trick, good lluck. nothing will work unless they somehow make that big pile of existing debt less relevant. the most direct and dishonest way is to simply take it off balance sheet. pretend it doesn't exist. there's a large overhang of old treasuries which could be orphaned, and new bonds issued that paid a fair market return, but who will really trust them? you can't just walk in the room and say , poof all the notional currency accounts held in the US are hereby cut in half. making the debt irrelevant makes the government irrelevant. the collapse of washington dc is a possible outcome. this is what happened to rome, is just got a lot smaller but it continued on, corrupt as ever. there might also be a ruse to assign that debt, give each american his pound of dirt to eat, then you would be paying tribute to rome for the privilege of being a citizen. that might happen too. the emperor obama figures in this any number of ways. like w bush, who was said to be planning a takeover of the us after his second term, appointing himself a third term, obama will not go away, just as the clintons and the bushes did not go away. so its an uphill battle, liberty fraternity equality noble words, but the guillotine is something you can feel.

[CarpetShag]

"The crash of 2014"
- title of a circular email sent by Casey Research to all their subscribers in October 2014 advising sale of all stock positions and to prepare for an imminent collapse of the S&P 500.
Based on "technical analysis" like the above. And similiarly, about as useless as dog crap in a bucket seat.

[Dewey Cheatum Howe]

Express elevator to hell.

https://www.youtube.com/watch?v=uDLQg8ZKBS8

[christiangustafson]

Private Vasquez knows what to do.

https://www.youtube.com/watch?v=VsuSpei9cf8

[TheRideNeverEnds]

1987 is irrelevant.

Today we have many mechanisms to make what happened then impossible now.  First of all if there are too many sell orders the exchanges will 'break' and all sell orders are canceled.  At the same time you have the PPT stepping in when they feel like it and buying the market up.  If that doesn't do it and we keep going down somehow the real circuit breakers kick in halting the descent making it not possible for price to decline.  Much of this is not needed right now though because everyone knows the free money must continue cause basically the whole world goes bankrupt if short term rates hit 5%.   At the first sign of sentiment changing to bearish the FED will come out and remind everyone they are there to keep the market going higher no matter what it takes.  

If there really is an outright panic and against all odds we crash down to the breakers that halt trading for the day (10% right now I think, go to CME site for real number) they will halt the market and it will reopen (at new new highs) after they announce QE 4.

[razorthin]

But then someone will be positioned to profit before the wipeout.  Gee, I wonder who?  Every open position must be closed in time - otherwise there is no profit...and no Fed.

[christiangustafson]

Big THANKS for posting this, Zero Hedge. 

This is just another Gedanken experiment.  I only want to float the meme out there that something like this is very possible.

We talk all day and into the night about systemic risk, but we all fall asleep thinking that they really do have things under control.

Well this is what it would look like, a real crisis under a powerless ZIRPy Fed.

[Clowns on Acid]

The catalyst for 1987 crash was the Bundebank raising interest rates in the face of Sec Treasury Baker at that time. It will be the same this time. Interest rates will begin to rise and not enough money can be printed to hold them down.

First massive recession then massive money printing, then gold and and silver rise appreciably.... then no ObamaCare and no SS marriage. Of course that shit couldn't last very long.     

[buzzsaw99]

the lesson of 1987 is that the market always goes up bitchez

[Consuelo]

My bet is on something outside the boundaries (and control) of the levers of $power here, that could quite possibly set negative waves in motion.   As in a series of foreign policy miscalculations, riding on the back of cock-sure wins domestically, a military-on-the-move with NATO, and a Chinese economic 'stumble'.   The ingredients are there for unbridled hubris to test its might - again.

[fowlerja]

Wow...your sequence of events lists 13 events which combined together deliver the crushing blow... you are a very smart person with alot of foresight... 

[CHC]

Well hell - that doesn't sound very promising.

[joker2thethief]

que sera  ...of course you are correct that the market will crash again, but the question is when and how much.

Some time in the next two years and quite a bit  sounds right to me, but it is truly anyones guess, given that we have never had this level of debt and central bank control before, not to mention the multiple layers of geopolitical risk.

Janet concurs that the triggers and course of the crash will be data dependant.

[theyjustcantstop]

my 2 cents worth, when 401k savers go to tap their, sold as 100% safe bond fund, as they've been doing regularly for 4 ys., (to pay for their semi-annual property taxes), and they have to wait a week for their cash,things will move.

[putbuyer]

Sub Concat()

Dim RngA As Range
Dim RngB As Range
Dim RngC As Range
Dim RngD As Range
Dim RngE As Range
Dim RngF As Range
Dim RngG As Range
Dim F As Long
Dim G As Long
Dim H As Long
Dim I As Long
Dim J As Long
Dim K As Long
Dim N As Long

Set RngA = Range("A1:A3")
Set RngB = Range("B1:B5")
Set RngC = Range("C1:C7")
Set RngD = Range("D1:D8")
Set RngE = Range("E1:E9")
Set RngF = Range("F1:F5")
Set RngG = Range("G1")
For F = 1 To RngF.Rows.Count
For G = 1 To RngE.Rows.Count
For H = 1 To RngD.Rows.Count
For I = 1 To RngC.Rows.Count
For J = 1 To RngB.Rows.Count
For K = 1 To RngA.Rows.Count
N = N + 1
RngG.Cells(N, 1) = RngA.Cells(K, 1) & RngB.Cells(J, 1) & RngC.Cells(I, 1) & RngD.Cells(H, 1) & RngE.Cells(G, 1) & RngF.Cells(F, 1)
Next K
Next J
Next I
Next H
Next G
Next F
End Sub

---

Sub ReorgData()
' hi
Dim a As Variant, o As Variant
Dim i As Long, j As Long, c As Long
Application.ScreenUpdating = False
With Sheets("Sheet1")   '<-- you can change the sheet name here
a = .Range("A1:C" & .Range("A" & Rows.Count).End(xlUp).Row)
ReDim o(1 To UBound(a, 1) * UBound(a, 2), 1 To 1)
For c = 1 To UBound(a, 2)
For i = 1 To UBound(a, 1)
j = j + 1: o(j, 1) = a(i, c)
Next i
Next c
.Columns(4).ClearContents
.Range("D1").Resize(UBound(o, 1), UBound(o, 2)) = o
.Columns(4).AutoFit
End With
End Sub

----

Sub Update8RowBlocks()
' hi
Dim a As Variant, o As Variant
Dim i As Long, j As Long, n As Long
Application.ScreenUpdating = False
With Sheets("Sheet1")   '<-- you can change the sheet name here
.Range("B1:C" & .Range("A" & Rows.Count).End(xlUp).Row).ClearContents
a = .Range("A1:A" & .Range("A" & Rows.Count).End(xlUp).Row)
ReDim o(1 To UBound(a, 1), 1 To 2)
For i = 1 To UBound(a, 1) Step 8
For n = 1 To 6
j = j + 1: o(j, 1) = a(i + 6, 1): o(j, 2) = a(i + 7, 1)
Next n
j = j + 2
Next i
.Range("B1").Resize(UBound(o, 1), UBound(o, 2)) = o
.Columns("B:C").AutoFit
End With
End Sub

[asfffasfff]

if its starting to crash: no saw that comming

obama administratives did nothing wrong according to the media