Summary:

• Today marks the 30th anniversary of the Black Monday in the US when Dow Jones tumbled above 20% during a single session
• Markets were in a similar stage of a rally in the peak of 1987 as they are now
• There are some similarities but also one remarkable difference between 1987 and present
• US30 remains well in the upward trend in both long and short term

There might not be many traders left that remember a panic selling that occurred exactly 30 years ago but the day still resonates on Wall Street. How could it be even possible to see a 20%+ decline during a single session? We recall that event and try to compare it to present situation.

How did it happen?

The first half of 1987 brought a continuation of impressive rally that started in 1982. The economy was doing fine, computerization increased and future was looking bright. Yet the third quarter brought some deterioration in sentiment. Stocks were sliding down and as a result traders’ interest in automated hedging strategies increased. These strategies sold futures for the DJIA and simultaneously bought US Treasuries when equity market was in decline. As a result, when selling intensified, these strategies did exactly the opposite of hedging – they compounded the sell-off just when there were no buyers in place. On 19 October 1987 the Dow plummeted by 23% during just one trading day!

There are similarities…

From certain angles the 80’ were not so much different from the present. The economy was doing great for few years already after a painful “double dip” recession that plagued the US in 1980-82. Together with 2008-2009 these were the most severe post-war recessions. Surprisingly the bull market was quite similar as well – the Dow surged by 242% between a low in March 1982 and a high in August 1987, a rally between a 2009 low and recent 2017 high was 255%. Even though Black Monday is already 30 years behind us, computers played a major role in spiraling the market downwards – since then the percentage of automated trading has increased dramatically and some do worry that in the event of a spike in volatility these algorithms could exacerbate the situation.

…but one striking difference

The DJIA30 has just closed above the 23000 points threshold for the first time in history. Meanwhile in 1987 equity markets were in decline for nearly two months leading to the crash. Between 25 August and 16 October 1987 the Dow slid by 17.5%, a correction we have not seen since 2015. So one could argue that Black Monday was just an exaggerated culmination of a large correction in the bull market that was resumed after the crash. 

US30 on the charts

Looking at the charts the US30 (DJIA30 underlying) certainly does not look as if it was crashing. On the weekly chart we can see the index surging above an upper limit of a previous long term upward channel and using this limit as a support subsequently. 

US30 surged past an upper limit of the channel on a weekly interval. Source: xStation5 

On the H1 interval we can see that the US30 has respected 50 and 75 hour moving averages with a lot of precision, treated them as a support and kept marching higher. For as long as price remains above these averages, we can talk about a short term upward trend. 

50 and 75 hour moving averages used to provide a solid support for the market. Source: xStation5 

Finally, it’s interesting to notice that over the past 10 years each month of the final quarter was positive on average – the only such quarter in a year. That was the case also for October despite a massive sell-off in 2008. October saw an average gain of 0.86%, November 0.81% and December 1.13%. Obviously these past returns are not a guarantee of a similar behaviour this time around – investors need to consider multiple factors in their decision making process. 

Each month of the fourth quarter brought gains over the past 10 years on average. Source: Bloomberg