Do not wait for ideal circumstances nor for the best opportunities; they will never come. Anonymous
1987 Market Crash: Every Crash = Opportunity
Updated as of July 2023
We couldn’t resist including the term “stock market crash” in the title, as it seems to be on everyone’s lips these days. Many voices out there want you to believe that we’re teetering on the edge of a Black Monday redux. However, these same individuals often overlook a crucial point: astute investors who focused on recovery following the 1987 stock market crash are the ones who reaped substantial rewards.
Fears are growing, with some expressing concerns about a recurrence of the 2008 crash, prompting investors to seek refuge. This sentiment has been echoed in articles like “The Guardian”
Headlines like “A Stock-Market Crash of 50%+ Would Not Be a Surprise” on Yahoo Finance and “Stock Market Crash 2016: This Is The Worst Start To A Year For Stocks Ever” on rightsidenews.com only add to the apprehension.
The naysayers are busy listing several factors that, in their opinion, could trigger another crash, but it’s important to remember that, from a mass psychology perspective, stock market crashes like the one in 1987 are often viewed as buying opportunities.
Navigating the Lessons of the 1987 Stock Market Crash
In the midst of market uncertainties, the naysayers are tirelessly enumerating various factors that, in their view, do not augur well for the market’s future.
One of these factors is ultra-low oil prices. It’s worth pondering this: not too long ago, experts were warning us about the detrimental effects of high oil prices on the economy. So, which narrative holds true? Many oil companies may face bankruptcy, but those that weather the storm will emerge stronger, poised for the next bullish phase. Interestingly, the current low oil prices have driven a surge in car sales, setting a record with 17.5 million vehicles sold. Consumers are now embracing gas guzzlers they previously avoided due to high fuel costs. Ultra-low oil prices can be likened to a financial stimulus of nearly $1 trillion injected into the global economy, as this is the amount the world economy stands to save under these conditions.
The Monumental Buying Opportunity of the 1987 Market Crash
One factor causing concern is the state of China’s economy, which is showing signs of slowing down. The fear is that this slowdown could have a substantial impact on our own economy.
It’s important to keep things in perspective regarding China’s economic growth. Even though there’s significant attention on this issue, the reality is that China’s growth is something every developed economy can only dream of achieving. U.S. corporations export approximately $500 billion worth of goods to China annually. Considering our $18 trillion economy, this export figure is relatively small and not a cause for panic; it’s more like a drop in the bucket.
Another source of uncertainty stems from the Federal Reserve’s decision to raise interest rates. It’s worth noting that the Fed only increased rates by a modest 0.25%, and they have the flexibility to reverse this position if necessary. In our perspective, even if they were to implement another 2-3 rate hikes, it’s unlikely to disrupt our economy significantly, as these rate hikes are starting from a historically low level.
Is This Time Any Different?
Let’s take a moment to reflect on the current situation. Haven’t we seen this scenario play out before? The narrative remains consistent: impending doom, warnings of an imminent stock market crash, and advice to seek refuge. Yes, in the short term, we’ve witnessed some turbulent market movements, but if we fast forward, history shows us that the markets always rebound and trend higher. It’s worth emphasizing once more that those who focused on recovering from the 1987 stock market crash were the ones who enjoyed substantial gains.
You might point to Japan as an exception, a market still trying to catch up decades later. However, it’s essential to recognize that the circumstances in Japan occurred in a different era. Today, we’re in a period characterized by the choice between devaluation or decline. In other words, nations actively devalue their currencies, either voluntarily or under external pressure, due to major players following suit. In such an environment, the conventional rules no longer apply, and central bankers typically respond by injecting liquidity into the markets.
Despite these challenges, if we examine the long-term Dow chart, it becomes evident that every so-called disaster ultimately presented itself as a buying opportunity.
Embrace Every Crash with a Bullish Outlook, Even 1987
We have consistently advocated against buying right at market peaks. Our approach has always been to consider significant pullbacks as opportunities to initiate new positions. Has the landscape changed significantly since last year? Are we now inclined to align ourselves with the pessimistic crowd? Before addressing that question, let’s delve into the matter of volatility.
Last year, we repeatedly highlighted the volatility issue, as our Volatility Indicator had surged into record territory. In fact, in early January, we revisited comments we shared with our subscribers in December 2015, which are listed below.
Our V indicator has surged to yet another high, so extreme volatility is here to stay. In fact, 2016 will probably be remembered as the most volatile year on record.
Volatility is a two-way street; one should expect large price swings on both ends of the scale. Given the run-up the markets have experienced over the past seven years, the current correction, while strong, is nothing to panic over.
Technical Outlook
Panic Equals Opportunity
It’s evident that traders are in a state of panic, and short-term market psychology has taken a hit. However, it’s important to distinguish between short-term and long-term perspectives. Just last week, we pointed out that the volume on most down days was considerably lower than on up days. Could this be an indication of smart money entering the market? Only time will provide the answer.
In the short term, the markets find themselves in oversold territory, which opens the door for a potential relief rally at any moment. Both the MACD and Relative Strength Indicator (RSI) are currently trading in oversold ranges, with the MACDs on the verge of a bullish crossover. Given the magnitude of the correction, there’s a reasonable chance that we haven’t reached the lows yet. The Dow will likely rally in the 16,700-16,900 range before retracing and dipping below current lows. This drop, possibly below the August lows, could shake out the remaining bulls, laying the foundation for a bottom and an upward price movement.
The Coronavirus Pandemic: A Potential Echo of the 1987 Market Crash (April 24, 2020)
Today, the oil market witnessed unprecedented chaos, with the May contract plummeting to negative $40, meaning sellers were essentially paying buyers to take their oil. The explanation behind this turmoil is rather straightforward. There’s an excessive oil surplus, and the May contract was on the verge of expiration. Additionally, there’s a shortage of storage capacity, prompting May contract holders to offer payments to exit their positions.
Amid this market volatility and the early signs of strength emerging in certain stocks, we are embracing an innovative approach for deploying the initial third of our funds. The first trigger for entering a specific stock will remain consistent: we deploy one-third of our funds when the stock trades within the recommended ranges. The second trigger, however, will be universal. When the Dow trades in the range of 19,950 to 20,400, all pending plays for which we have no existing positions will be activated. At this point, traders should place limit orders to initiate classes at the most favourable prices. For instance, if a stock is trading between $19.90 and $20.10, you would place a limit buy order within that range to open a position.
Hysteria is the main Theme now
Instead of fleeing for the hills, make a list of top-notch companies and load up. This will probably be the last time in many years that individuals will have an opportunity to become filthy rich. Don’t follow the masses, for they are doomed to lose; use them as a contrarian signal.
The paranoiac is the exact image of the ruler. The only difference is their position in the world. One might even think the paranoiac is the more impressive of the two because he is sufficient unto himself and cannot be shaken by failure. Elias Canetti
Originally Published on January 28, 2016. Updated Over the Years, with the Latest Update Completed on July 2023
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