1987 vs. 2014: Should We Be Concerned About A Crash?

By: Chris Ciovacco | Tue, Jan 21, 2014
Print Email

Why You Should Care About Black Monday

Since it happe32ned 26 years ago, many investors have lost perspective on the widespread financial damage that occurred on October 19, 1987. The S&P 500 dropped 20.47% on the day known as "Black Monday".

Black Monday


Bull Markets Are Typically Derailed By Recessions

The recent net-worth-denting bear markets were caused, for the most part, by problems in the economy that eventually translated into economic weakness. The dot-com bear market was accompanied by a contraction in the U.S. economy.

GDP Quarterly Change 2000-2001

After the housing bubble began to lose air, the financial crisis bear market that followed was marked by some ugly GDP figures.

GDP Quarterly Change 2007-2008


How About 1987?

The GDP figures in 1987 and 1988 did not align with the sharp drop in equity prices that occurred on Black Monday.

GDP 1987-1988


Markets Move Based On Fundamental Perceptions

There is a reason traders who focus on price/observable evidence are successful. Price captures the aggregate opinion of all market participants about future economic outcomes, earnings, valuations, systemic risk, monetary policy, the Fed, etc. In 1987, perception shifted quickly. Using a simple example from 2006-2008 to illustrate the concepts of using observable evidence, the slope of the green arrow below told us bullish economic conviction was stronger than bearish economic fear. The orange arrow told us the conviction of the bulls was waning, and to have defensive plans in place. The slope of the red arrow told us economic fear was much stronger than bullish economic conviction. The slopes of lines A, B, and C are observable and can be incorporated into an IF, THEN investment strategy.


1987: Were The Charts Helpful? You Decide

If broad measures of economic activity were not particularly helpful in spotting trouble in 1987, could charts/observable evidence have assisted investors in terms of reducing the damage to their net worth? This week's video examines 1987 in detail and compares the market profile the day before Black Monday to the current profile in January 2014. The video also incorporates IF, THEN concepts to build prudent investment allocations based on evidence in hand, rather than relying on predictions of a very uncertain future.

If you want another example of using observable evidence to navigate a difficult period, this video clip walks through the 2010 "Flash Crash" step by step.


2014: China Hampers Fundamental Outlook

Bank - Confidence in China remains fragile

As we outlined in this January 20 video, the big picture continues to align with the economic and stock market bulls, but bullish conviction is waning. Concerns about a credit crunch and/or defaults in China continue to weigh on investors' minds. China's central bank is trying to right the ship. From Bloomberg:

China's benchmark money-market rate fell while stocks rebounded as the central bank added more than 255 billion yuan ($42 billion) to the financial system and expanded a loan facility to meet Lunar New Year demand for cash.

As of 1:00 p.m. EST Tuesday, the injection of cash was not translating into renewed confidence; the emerging markets ETF (EEM) was down 0.40%, and the China ETF (FXI) was down 0.25%.


Investment Implications

If defensive assets gain traction, our concerns about recent slowing bullish conviction will increase. During Tuesday's session, growth-oriented small caps were still providing leadership while defensive assets, such as consumer staples were lagging the broader S&P 500 (see charts). For now, the slowing bullish momentum has not translated into meaningful and observable changes to the market's risk-reward profile. The evidence continues to favor stocks. Consequently, we continue to maintain positions in U.S. stocks (VTI), financials (XLF), technology (QQQ), small caps (IJR), Europe (FEZ), and global stocks (VT).

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

Copyright © 2006-2014 Chris Ciovacco

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/