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posted on 24 October 2015

Is It 1987 All Over Again? The Answer Might Surprise You

by Greg Guenthner, Daily Reckoning

It happened 28 years ago October 19 ...

I'm talking about Black Monday. That fateful moment in 1987 still stands as the largest ever one-day percentage loss for the Dow.

I wasn't there-but those who were on the Street at the time were shaken to their core.

Yale Hirsch recounted in the 2000 Stock Trader's Almanac, Jason Zweig retells on his blog:

"Traders on Wall Street's equity desks sit watching the ticker in shocked, dead silence as it plunges faster and farther than anyone alive has ever seen. By day's end, more than 500 million shares have changed hands and traumatized analysts are predicting a severe recession."

Of course, we now know that this severe recession never materialized. But at the time, shell-shocked investors didn't know what to think.

So the question is, are we due for another 1987-type meltdown? With all the bubble talk we've been hearing, could this be the big one?

Today, you'll find out...

The 1987 crash is frequently trotted out in the financial media as a reminder that, yes, even strong bull markets can melt down.

True, markets that go up will eventually correct. There are only a handful of times in history where folks have forgotten this simple fact. And let me go ahead and end the suspense now- this ain't one of 'em.

So if you're wondering if we're in store for a 1987-esque crash, think again. It's not happening right now. Not in these market conditions...

The 1987 crash was preceded by an extremely powerful rally that demanded a hard reset. You have to go back more than a year before the crash to truly understand what was happening. 1986 and 1987 weren't just good years. They were insanely good years - too good, in fact.

The S&P actually gained 60% in the 21 months leading up to the crash. And the majority of these gains were logged between January and August of '87. That's the very definition of too far, too fast.


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Does the market look anything like that over these past two years?

You tell me...

That '87 crash makes August's 10% correction look like a lazy summer day! And just look at the huge 60% advance leading up the meltdown. That's some serious gasoline on the fire. The best the S&P could muster leading up to our current pullback was 15% since Jan 1, 2014. Not too shabby-but not an insane rally by any stretch.

But even if we leave all of this evidence out of our analysis, the odds of a mega-crash remain incredibly low...

Mark Hulbert explains over at MarketWatch:

"A single-session drop as big as the one in 1987, for example, is predicted - over long periods of time - to occur once every 104 years, on average. I hasten to add that this doesn't mean a crash of this magnitude will occur like clockwork every 104 years. Instead, the researchers believe that this will be their average frequency over long periods. So it's possible we'll get two 20% crashes in our lifetimes - or none."

While the market could certainly move lower from here, the odds are stacked against a rapid, devastating crash like we saw back in 1987. So quit your worrying and concentrate on the best ways to position your portfolio for gains ...

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