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Black Monday… Part Two

March 9, 2020

Black Monday… Part Two

At its lows today, this was the market’s biggest down day since 1987 (by the close the biggest since Oct 2018)!

Source: Bloomberg

In a reflection of the total loss of faith policymakers among BTFDers, @Sentimentrader notes that:

This is the only day in the history of S&P 500 futures that they gapped down more than -5% and didn’t close above the open.

Did the 11-year-long, almost unstoppable bull run that started on March 9, 2009, just end on March 9, 2020?

Source: Bloomberg

Here’s another stat for the record books. Total U.S. Trading volume, on a 10-day moving average basis, is now higher than during the meltdown in 2008. Volume is another whopper today, over 17 billion shares.

Source: Bloomberg

Thanks to the market perceiving President Trump’s response as remaining one of “denial” of the scale of the problem, and concerns that any fiscal stimulus will be underwhelming, things were already anxious as markets opened Sunday night. But the situation was worsened considerably as both Russia and Saudi Arabia stood poised to flood the market with cheap crude (supply) in an all-out price war just as the coronavirus is spurring the first contraction in demand since 2009.

“The situation we are witnessing today seems to have no equal in oil market history,” said IEA Executive Director Fatih Birol.

“A combination of a massive supply overhang and a significant demand shock at the same time.”

Oil futures fell by about one-third in New York and London on Monday, the biggest drop since the Gulf War in 1991, before pulling back to a 20% decline.

Source: Bloomberg

Crashing below $30!

Crashing US HY Energy sector bond prices…

…click on the above link to read the rest of the article…

Black Monday – Can It Happen Again?

September 12, 2019

Black Monday – Can It Happen Again?

The 1987 stock market crash, better known as Black Monday, was a statistical anomaly, often referred to as a Black Swan event. Unlike other market declines, investors seem to be under the false premise that the stock market in 1987 provided no warning of the impending crash. The unique characteristics of Black Monday, the magnitude and instantaneous nature of the drop, has relegated the event to the “could never happen again” compartment of investors’ memories. 

On Black Monday, October 19, 1987, the Dow Jones Industrial Average (DJIA) fell 22.6% in the greatest one-day loss ever recorded on Wall Street. Despite varying perceptions, there were clear fundamental and technical warnings preceding the crash that were detected by a few investors. For the rest, the market euphoria raging at the time blinded them to what in hindsight seemed obvious.

Stock markets, like in 1987, are in a state of complacency, donning a ‘what could go wrong’ brashness and extrapolating good times as far as the eye can see. Even those that detect economic headwinds and excessive valuations appear emboldened by the thought that the Fed will not allow anything bad to happen.  

While we respect the bullish price action, we also appreciate that investors are not properly assessing fundamental factors that overwhelmingly argue the market is overvalued. There is no doubt that prices and valuations will revert to more normal levels. Will it occur via a long period of market malaise, a single large drawdown like 1987, or something more akin to the crashes of 2001 and 2008? When will it occur? We do not have the answers, nor does anyone else; however, we know that those who study prior market drawdowns are better prepared and better equipped to limit their risk and avoid a devastating loss. 

 …click on the above link to read the rest of the article…

A Day of Carnage in the Trading Rooms

October 20, 2018

A Day of Carnage in the Trading Rooms

The Hutch ReportThirty one years ago today, on Oct. 19,1987, the Dow Jones Industrial Average plunged 22.6%, its largest one-day percentage-point drop ever.

You may have noticed that the financial media has started to highlight the point drops as opposed to the percentages. To say the Dow lost 500 points makes better news than saying it lost 2%. In percentage terms though this years recent plunges pale in comparison to what “could” happen as we have seen in history.

Here are five of the worst stock market crashes in U.S. history, based on daily percentage losses (source: ajc.com):

Oct. 19, 1987

Percentage change: -22.61 percent

About: Known as “Black Monday,” this devastating crash began in Hong Kong, spread to Europe and then hit the U.S. hard.

Oct. 28, 1929

Percentage change: -12.82 percent

About the crash: The Wall Street Crash of 1929, also known as the Great Crash or the Stock Market Crash of 1929 started on Oct. 24 and signaled the beginning of the 12-year Great Depression. Black Monday, the fourth and worst day of the crash, saw a drop of 12.82 percent.

Dec. 18, 1899

Percentage change: -11.99 percent

About the crash: During the Panic of 1896, the U.S. experienced an acute economic depression caused by a drop in silver reserves and deflation.

Oct. 29, 1929

Percentage change: -11.73

About the crash:  Black Tuesday was the fifth day of the the Wall Street Crash of 1929, also known as the Great Crash or the Stock Market Crash of 1929 that started on Oct. 24 and signaled the beginning of the 12-year Great Depression.

Nov. 6, 1929

Percentage change: -9.92

About the crash: Just a week after the height of the 1929 Stock Market Crash, investors saw another dip.

…click on the above link to read the rest of the article…

Stock Market Crash of 1987

October 19, 2018

Stock Market Crash of 1987

The first contemporary global financial crisis unfolded on October 19, 1987, a day known as “Black Monday” when the Dow Jones Industrial Average dropped 22.6 percent.

American newspaper headlines describing the stock market plunge of October 19, 1987

Composite of newspaper headlines reporting the Stock Market Crash of 1987 (Associated Press)

Why the most-recent selloff was just the beginning

February 22, 2018

Why the most-recent selloff was just the beginning

On October 19, 1987, the Dow experienced its biggest one-day percentage loss in history – plunging 22.6%.

The day will forever be known as “Black Monday.” The selloff was so fast and so severe, nothing else even comes close.

The second worst percentage loss for the Dow was October 28, 1929 (also Black Monday) when the exchange fell 12.82%. It fell another 11.73% the next day (you guessed it… “Black Tuesday”). Then the Great Depression hit.

A lot of people blame portfolio insurance for the severity of the market drop in 1987.

At the time, portfolio insurance had become a super popular product for the largest institutional investors. Portfolio insurance would “hedge” their portfolios by selling short S&P 500 futures (which profit when the market falls) when stocks fall by a certain amount. The idea was the gains from selling the S&P futures would offset the losses from the falling prices of the underlying portfolio.

If stocks fell more, the big investors would sell more futures.

The problem with portfolio insurance is it was programmatic. And when the losses inevitably came, it created a feedback loop. Selling begot selling.

But what initially ignited that selling back in 1987?

Matt Maley is a former Salomon Brothers executive who was on the trading floor for Black Monday. He shared his thoughts with CNBC last year to mark the 30th anniversary of the event.

Maley reminded us of the popularity of another strategy in those days – merger arbitrage. This was the time of Gordon Gekko, when corporate raiders would borrow tons of money – typically via high-yield bonds – to buy other firms.

Merger arbitrage is simply buying shares of the takeover candidate and shorting shares of the acquiring firm. It’s a speculative strategy that tries to capture the spread between the time the deal is announced and when it (hopefully) closes.

…click on the above link to read the rest of the article…

Stock Market Plunges: Down 1,175 Sparking Recession Fears

February 6, 2018

Stock Market Plunges: Down 1,175 Sparking Recession Fears

stock-crash-dynamite

Many analysts have predicted an economic crisis is just over the horizon. Could the stock market’s recent plunge be the recession they’ve said is long overdue?

The drop amounted to just a 4.6% drop, which doesn’t seem like much; but it’s the biggest decline since August 2011, during the European debt crisis. But it was nowhere close to the destruction on Black Monday in 1987 or the financial crisis of 2008. Still, for investors watching the steady upward climb since Election Day, it was alarming. The plunge pushed stocks closer to what’s called a correction, or a 10% decline from their most recent high point. The S&P 500 is down almost 8% from its all-time high.

Although stocks went into a freefall yesterday, the Dow had been down 1,600 points.  A small rally recovered some of the losses. According to CNN Money, the rout in U.S. markets continued to ripple around the globe. Japan’s Nikkei index plunged 4% in Tuesday morning trading while the S&P/ASX 200 in Australia dropped 3%. The recent sell-off wiped out the Dow and S&P 500 gains for the year and left the Nasdaq barely in positive territory for 2018.

The trouble in the market began early last week when investors began focusing on a number of lingering concerns. If the economy gets much stronger, it could touch off inflation, which, according to CNN, has been mysteriously missing for the nine years of the post-crisis recovery. But Peter Schiff has begged to differ, saying that the United States has not experienced a “growth story” but an “inflation story.”

“People are dealing with the shock of seeing real inflation for the first time in a while,” said Bruce McCain, chief investment strategist at Key Private Bank. Investors have also been nervously watching the bond market, where yields have been creeping higher. But many analysts claim the next recession will begin in the bond market.

…click on the above link to read the rest of the article…

“The Nightmare Scenario” Revisited: Albert Edwards Lays Out The Next “Black Monday”

October 27, 2017

“The Nightmare Scenario” Revisited: Albert Edwards Lays Out The Next “Black Monday”

Is it the onset of a recession or the fear of a recession that causes a crash? That is what SocGen’s bear (or, as he calls himself this time, wolf) Albert Edwards contemplated on the 30th anniversary of Black Monday, before reaching the conclusion that it’s the latter. Having taken several weeks off from publishing his ill-named global strategy “weekly” report to meet with clients, Edwards finds that most clients “seem to harbour similar fears as I, namely that the QE-driven bubble will burst at some stage and lay low the global economy, just as it did in 2007.” Yet where clients differ, is on the timing of said burst:

“despite my bearish (or is it wolfish) howling, virtually no clients think the denouement will come any time soon and that the equity bull market should have at least 12-18 months left to run. Most can see nothing on the immediate horizon that might burst this bubble.”

So, doing his public service to boost the overall sense of dread, and perhaps fear, Albert takes it upon himself to reprise recent discussions with clients, and in his latest letter explains “what might catch them out in the near term.” To do this, Edwards focuses first and foremost on the catalysts behind the abovementioned 1987 “Black Monday” crash.

A retrospective macro-narrative was inevitably wrapped around the ?Black Monday? 19 October 1987 equity market crash. My 30-year recollection is pretty good: 1987 saw a buoyant equity market rising briskly through most of the year as the oil price recovered from the previous year?s collapse (from $30 to $8, see chart below). After a year in the doldrums the US economy started to accelerate notably through 1987 as the impact of 1986 interest rate cuts and a lower dollar worked.

…click on the above link to read the rest of the article…

Volatility and the Alchemy of Risk

October 21, 2017

Volatility and the Alchemy of Risk

Reflexivity in the Shadows of Black Monday 1987

The Ouroboros, a Greek word meaning ‘tail devourer’, is the ancient symbol of a snake consuming its own body in perfect symmetry. The imagery of the Ouroboros evokes the infinite nature of creation from destruction. The sign appears across cultures and is an important icon in the esoteric tradition of Alchemy. Egyptian mystics first derived the symbol from a real phenomenon in nature. In extreme heat a snake, unable to self-regulate its body temperature, will experience an out-of- control spike in its metabolism. In a state of mania, the snake is unable to differentiate its own tail from its prey, and will attack itself, self-cannibalizing until it perishes. In nature and markets, when randomness self-organizes into too perfect symmetry, order becomes the source of chaos (1).

The Ouroboros is a metaphor for the financial alchemy driving the modern Bear Market in Fear. Volatility across asset classes is at multi-generational lows. A dangerous feedback loop now exists between ultra-low interest rates, debt expansion, asset volatility, and financial engineering that allocates risk based on that volatility. In this self-reflexive loop volatility can reinforce itself both lower and higher. In a market where stocks and bonds are both overvalued, financial alchemy is the only way to feed our global hunger for yield, until it kills the very system it is nourishing.

The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies that simultaneously exert influence over, and are influenced by, stock market volatility(2). We broadly define the short volatility trade as any financial strategy that relies on the assumption of market stability to generate returns, while using volatility itself as an input for risk taking. Many popular institutional investment strategies, even if they are not explicitly shorting derivatives, generate excess returns from the same implicit risk factors as a portfolio of short optionality, and contain hidden fragility.

…click on the above link to read the rest of the article…

Weekly Commentary: Arms Race in Bubbles 

October 21, 2017

Weekly Commentary: Arms Race in Bubbles 

The week left me with an uneasy feeling. There were a number of articles noting the 30-year anniversary of the 1987 stock market crash. I spent “Black Monday” staring at a Telerate monitor as a treasury analyst at Toyota’s US headquarters in Southern California. If I wasn’t completely in love with the markets and macro analysis by that morning, there was no doubt about it by bedtime. Enthralling.

As writers noted this week, there were post-’87 crash economic depression worries. In hindsight, those fears were misplaced. Excesses had not progressed over years to the point of causing deep financial and economic structural maladjustment. Looking back today, 1987 was much more the beginning of a secular financial boom rather than the end. The crash offered a signal – a warning that went unheeded. Disregarding warnings has been in a stable trend now for three decades.

Alan Greenspan’s assurances of ample liquidity – and the Fed and global central bankers’ crisis-prevention efforts for some time following the crash – ensured fledgling financial excesses bounced right back and various Bubbles hardly missed a beat. Importantly, financial innovation and speculation accelerated momentously. Wall Street had been emboldened – and would be repeatedly.

The crash also marked the genesis of government intervention in the markets that would evolve into the previously unimaginable: negative short-term rates, manipulated bond yields, central bank support throughout the securities markets, Trillions upon Trillions of central bank monetization and the perception of open-ended securities market liquidity backstops around the globe. Greenspan was the forefather of the powerful trifecta: Team Bernanke, Kuroda and Draghi. Ask the bond market back in 1987 to contemplate massive government deficit spending concurrent with near zero global sovereign yields – the response would have been “inconceivable.”

…click on the above link to read the rest of the article…

Black Monday 2.0: The Next Machine-Driven Meltdown

October 16, 2017

Black Monday 2.0: The Next Machine-Driven Meltdown

In the rise of computer-driven trading, some hear echoes of the stock market’s 1987 crash. Beware the feedback loop.

Black Monday. Although the event to which those two words refer occurred 30 years ago, they still carry the weight of that day—Oct. 19, 1987—when the Dow Jones Industrial Average shed nearly a quarter of its value in wave after wave of selling.

No one in living memory had seen anything like it, at least not in the U.S., and in the postmortems conducted to understand just how the Dow managed to drop 508 points in one day, experts found a culprit: so-called portfolio insurance, a quantitative tool designed to use futures contracts to protect against market losses. Instead, it created a poisonous feedback loop, as automated selling begat more of the same.

Since that day, markets have rallied and markets have tumbled, and still we marvel at the unintended consequences of what, in hindsight, was an obviously misguided strategy. Yet in the ensuing years, market participants have come to rely increasingly on computers to run quantitative, rules-based systems known as algorithms to pick stocks, mitigate risk, place trades, bet on volatility, and much more—and they bear a resemblance to those blamed for Black Monday.

The proliferation of computer-driven investing has created an illusion that risk can be measured and managed. But several anomalous episodes in recent years involving sudden, severe, and seemingly inexplicable price swings suggest that the next market selloff could be exacerbated by the fact that machines are at the controls. “The system is more fragile than people suspect,” says Michael Shaoul, CEO of Marketfield Asset Management.

…click on the above link to read the rest of the article…

Greenspan: “This Is The Worst Period I Recall; There’s Nothing Like It”

June 25, 2016

Greenspan: “This Is The Worst Period I Recall; There’s Nothing Like It”

During a CNBC inteview today, when discussing the historic Brexit vote outcome, Alan Greenspan unleashed a fiery sermon that could have been prepared just by reading a random selection of posts from this website, the former Fed chairman told his shocked hosts that the current period, far from the raging “Obama recovery” spun every day by adaministration propaganda appratchicks and one that prompted the Fed to unleash a ridiculous rate hike cycle in December just as the US is sliding into a recession, and is instead the “worst period” he has seen, surpassing even the infamous Black Monday in severity.

“This is the worst period, I recall since I’ve been in public service. There’s nothing like it, including the crisis — remember October 19th, 1987, when the Dow went down by a record amount 23 percent? That I thought was the bottom of all potential problems. This has a corrosive effect that will not go away. I’d love to find something positive to say.”

Of course, what he is referring to was a market shock which was the result of a massive capital account imbalance resulting from the aftermath of the Louvre Accord coupled with the then trendy Portfolio Insurance (in which everyone was on the same side of the boat, much like now) and not so much an all out economic malaise. Which, however, does beg the question when a Black Monday-like market crash is coming?

Rhetorical questions aside, Greenspan was referring to the unprecedented combination of economic stagnation, deteriorating demographics, insolvent entitlement programs, social inequity and wealth division, and of course, a historic debt overhang which could and should have been cleared out in the crash of 2008 but instead was preserved to avoid wiping out the same “equityholders” who also happen to be the Fed’s direct and indirect stakeowners.

…click on the above link to read the rest of the article…

Market risk; model smash

September 12, 2015

Market risk; model smash

Seeing the market crash from a few weeks ago, it is clear how quickly the markets can ferociously thrust past one’s risk models.  Risk models that failed to safeguard against risk when it absolutely mattered the most.  Models that left many large hedge funds hemorrhaging – top funds which by definition were supposed to protect their investors during the August tumult.  Instead when markets broke bad, a lot of things “went wrong”.  And stayed that way.  In this article, we explore a number of the large U.S. market crashes since the mid-20th century, and show how the recent bust compares.  We learn why relying on tail risk models whose approximations presume to work consecutively at all times, can lead to failure.  The key for investors (if they must be active) is to always remain vigilant.  Professor Nassim Taleb recently expressed it nicely:

The *only* way to survive is to panic & overreact early, particularly [as] those who “don’t panic” end up panicking & overreacting late.

And there were many who wound up in panic mode, in recent weeks.  Expeditiously selling at a loss, under record volume on August 24 (China’s Black Monday).  Let’s first consider what an overall market crash look like.  We quickly show a symmetrical V-shaped illustration here.  This illustration also shows a rise in fear on the way down, with peak panic near the bottom (the orange star), then followed by up-moves that mirror the previous down-moves.  We will need to review this overall shape in a future article.  But for now we discuss simply the left side of the illustration (the solid brown down-arrows).

…click on the above link to read the rest of the article…
 

 

 

The Market’s “Other” Panic Indicator Just Went Off The Charts

September 1, 2015

The Market’s “Other” Panic Indicator Just Went Off The Charts

With indicators from macro-fundamentals (e.g. retail sales, core capex, inventory-to-sales) to market-oriented measures (VIX levels and backwardation, HY credit spreads, commodity prices) all flashing various colors of dead canary in the coal-mine red, we thought today’s colossal spike in the Arms (TRIN) Index was a notable addition.

An Arms Index value above one is bearish, a value below one is bullish and a value of one indicates a balanced market. Traders look not only at the value of the index, but also at how it changes throughout the day. Traders look for extremes in the index value for signs that the market may soon change directions. The Arm’s Index was invented by Richard W. Arms, Jr. in 1967. In essence, a sudden surge in the TRIN indicates a jump in trader lack of confidence, as everyone scrambles to either go long the 2-3 rising stocks, or to sell or short the biggest decliners, ignoring the bulk of the market..

Today’s move was far greater than “Black Monday’s market-halting crash:

In longer context:

As we noted previously, the Arms index is an indicator of market breadth essentially tracks lemming like momentum-chasing behavior with respect to volume… meaning today saw panic-buying volumes which given that it was dip-buyers at the close, we suspect won’t end well…

 

…click on the above link to read the rest of the article…

Is This Black Monday Crash The BIG ONE? It Doesn’t Matter

August 24, 2015

Is This Black Monday Crash The BIG ONE? It Doesn’t Matter

After losing 11% last week, Shanghai this morning was down almost -9% at one point, after lunch went back up to -6.5%, and ended its day at -8.49%. A Black Monday for sure, but is this the BIG ONE? It really doesn’t matter one bit. Unless perhaps you persist in calling your self an investor, in which case we pity you, but not for losing your shirt. Because God knows we’ve said enough times now that there are no functioning markets anymore, and therefore no-one who can rightfully lay claim to the title ‘investor’.

Plenty amongst you will be talking about economic cycles, and opportunities, and debate how to ‘play’ the crash, but all this is useless if and when a market doesn’t function. And just about all markets in the richer part of the world stopped functioning when central banks started buying assets. That’s when you stopped being investors. And when market strategies stopped making sense.

Central banks will come up with more, much more, ‘stimulus’, but what China teaches us today is that we’re woefully close to the moment when central banks will lose the faith and trust of everyone. After injecting tens of billions of dollars in markets, which thereby ceased to function, the global economy is in a bigger mess then it was prior to QE. The whole thing is one big bubble now, and we know what invariably happens to those.

More QE is not an answer. And there is no other answer left either. Those tens of trillions will need to vanish from the global economy before any market can be returned to a functioning one, and by that time of course asset prices will be fraction of what they are now. It may not happen today, but that doesn’t matter: what’s important to know is that it WILL happen.

…click on the above link to read the rest of the article…

“Black Monday” – Shanghai Composite Goes Red For The Year, Wiping Out 60% In Gains, 2000 Stocks Limit Down

August 24, 2015

 “Black Monday” – Shanghai Composite Goes Red For The Year, Wiping Out 60% In Gains, 2000 Stocks Limit Down

China Xinhua News 

✔@XHNews

Black Monday! join global panic selloff, dive 8.5%, worst since Asian financial crisis at midday

George Chen 

✔@george_chen

FACTS: By midday break, nearly 2000 stocks down 10% daily limit in Chinese market — only 13 stocks up; Shanghai benchmark index down 8.45%

But… but… pension funds are “allowed” to buy stocks.

Judging by the first few minutes of trading in the first thing to open this evening on the mainland, the CSI 300 Index Futures which immediately tumbled by 4% to 3340, China’s attempt to deflect attention from the fact that it did not do a 50-100 bps RRR cut is not doing too well.

Some other indicative levels which are in line with the CSI:

  • Shanghai Composite to open -3.8%, some 130 points below the 3,500 “hard line” support level below which it is a nothing but air back to 2000
  • Shenzhen down 4.3%
  • ChiNext down 5.1%

That said, we expect the National Team to not give up without a big fight, and forcefully step in any minute and do everything in its power to prevent the resultant plunge in the Shanghai Composite which is set to open shortly, or else SHCOMP 2000 beckons, and with it lots and lots of social unrest.

* * *

Update: Shanghai Composite now down -5.7%

…click on the above link to read the rest of the article…

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