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Friday, October 20, 2017 10:24:33 AM
Risky Bulls and Black Monday - Can History Repeat Itself?
By: BCA Research | October 19, 2017
Monday, 19 October 1987 marked the first modern global financial crisis. Even thirty years later, it remains the largest one-day decline in the history of the DJIA. Black Monday was the end of a potent bull market and the repercussions were felt globally with New Zealand suffering, arguably, the heaviest blows.
The set up
Many point to portfolio insurance as a factor in the waves of selling that deepened the crisis.
• Portfolio insurance was developed to allow investors to participate in equity market gains while limiting their downside exposure. With the help of computer technology, index futures were sold when markets fell. When the market recovered, the programmes would unwind the future positions.
• The technique was flawed in many ways and, significantly, the index futures market wasn’t deep enough to accommodate selling pressure resulting from a significant correction.
• Portfolio insurance helped create a self-reinforcing spiral between the cash market in New York and the futures market in Chicago. As heavy selling of stocks in New York triggered heavy selling of index futures in Chicago as insured portfolios sold futures to limit direct cash exposures. New sales pushed share prices lower in New York and a vicious circle emerged.
But portfolio insurance was not the only factor – Black Monday was a global event and portfolio insurance was not a factor on other bourses.
What we said
Our Bank Credit Analyst warned of the U.S. equity market’s increasing vulnerability and recommended reducing exposure ahead of black Monday.
“However, the key for investors in this bull market is to have positions which are sufficiently comfortable so that they can ride our sudden, dramatic corrections…” March 1986, Bank Credit Analyst
What happened next
Following the crisis, a new central bank template emerged that allowed for a faster and more incisive response to market crises. The contagion was countered by the Fed’s readiness to act as a source of liquidity.
Black Monday was contained in the financial markets despite fears that it would spread. We don’t see an imminent repeat of the 1987 crisis in 2017 and we continue to scan the horizon for indications that the long-running bull market may be running out of steam.
But the question remains, with the speed of technology, collision of algorithms, derivatives and global pressures, could a Black Monday happen again?
https://www.bcaresearch.com/marketing/blog/405
• DiscoverGold
Click on "In reply to", for Authors past commentaries
By: BCA Research | October 19, 2017
Monday, 19 October 1987 marked the first modern global financial crisis. Even thirty years later, it remains the largest one-day decline in the history of the DJIA. Black Monday was the end of a potent bull market and the repercussions were felt globally with New Zealand suffering, arguably, the heaviest blows.
The set up
Many point to portfolio insurance as a factor in the waves of selling that deepened the crisis.
• Portfolio insurance was developed to allow investors to participate in equity market gains while limiting their downside exposure. With the help of computer technology, index futures were sold when markets fell. When the market recovered, the programmes would unwind the future positions.
• The technique was flawed in many ways and, significantly, the index futures market wasn’t deep enough to accommodate selling pressure resulting from a significant correction.
• Portfolio insurance helped create a self-reinforcing spiral between the cash market in New York and the futures market in Chicago. As heavy selling of stocks in New York triggered heavy selling of index futures in Chicago as insured portfolios sold futures to limit direct cash exposures. New sales pushed share prices lower in New York and a vicious circle emerged.
But portfolio insurance was not the only factor – Black Monday was a global event and portfolio insurance was not a factor on other bourses.
What we said
Our Bank Credit Analyst warned of the U.S. equity market’s increasing vulnerability and recommended reducing exposure ahead of black Monday.
“However, the key for investors in this bull market is to have positions which are sufficiently comfortable so that they can ride our sudden, dramatic corrections…” March 1986, Bank Credit Analyst
What happened next
Following the crisis, a new central bank template emerged that allowed for a faster and more incisive response to market crises. The contagion was countered by the Fed’s readiness to act as a source of liquidity.
Black Monday was contained in the financial markets despite fears that it would spread. We don’t see an imminent repeat of the 1987 crisis in 2017 and we continue to scan the horizon for indications that the long-running bull market may be running out of steam.
But the question remains, with the speed of technology, collision of algorithms, derivatives and global pressures, could a Black Monday happen again?
https://www.bcaresearch.com/marketing/blog/405
• DiscoverGold
Click on "In reply to", for Authors past commentaries
Information posted to this board is not meant to suggest any specific action, but to point out the technical signs that can help our readers make their own specific decisions. Your Due Dilegence is a must!
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