Friday, June 26, 2015

Does 1987 have any lessons for today?

I think it does.  Well, I think, you know what I think, the usual speculative nightmarish scenarios, the usual apocalyptic distractions on the internet. 

But this one is novel, because it's based on an analysis of the 1987 (the year, not an S&P 500 level) crash.  Well, what happened in 1987?

We had a decline off a significant high, followed by a bear-bull battle off that initial low.  The low held a second time, with a deeper retrace back up, before we got our famous crash, a true waterfall.

It's a clear A-B-C move in my book. 

1987 S&P 500

I was 16 and a Senior in high school when this went down.

So let's apply the 1987 idea to today, see if it suggests anything interesting.  We are currently in the process of finishing up a very long-in-tooth ending-diagonal 5th wave rally off the October 2014 lows at 1820 SPX.

When an ending-diagonal finally breaks down, we get a rapid sell-off straight back to the point of origin, 1820 SPX.  For a 1987 scenario, the speed and slope of this decline is our first critical piece of information, as it gives us the final target for the catastrophic "C" wave collapse.

The second critical bit of information is then how long the fight off the initial low -- 1820 SPX -- lasts before a final crisis.  Why is this important?  The fight over support and resistance levels creates a delay ... which only makes the ultimate target for "C" go lower and lower, into the depths.

So, you want a crash, one for the history books, one that removes all doubts about the future we have already consumed?  Look to October.

The 1987 crash applied to today

The vertical lines on the chart mark various cycle turn dates of interest to me along the way.

I'll propose a sequence of events for how this plays out.

  1. The Greece problem gets resolved in the short-to-medium term.  We are not talking about huge sums of money needed, as well as just enough "austerity" to dissuade the other worthless grifter Mediterranean EU states from asking for their gibs and gravy, to kick this can. 
  2. The market tops in two weeks, on the release of the June FOMC Minutes, at 2150 SPX.  Fed members feel cheap and used and are generally pissed-off at this point, so they are screaming for hikes and "normalizing" rates.
  3. The market breaks wedge support and sells off to 1820 SPX.  This is the long-awaited "correction", and it is bought.
  4. We rally halfway-back to 1985 SPX into late August.
  5. The 2nd estimate of Q2 GDP is released, and it is negative, meaning an official recession.
  6. The market returns to 1820 SPX on this grim news, and the knowledge that the used-and-abused Fed is really, seriously-this-time-guys going to hike rates at the September meeting.
  7. We sit right on critical support, 1820 SPX, into the September FOMC.  The market calls their bluff in the most sick and insidious way.
  8. The Fed blinks, cites the recessionary GDP, and does not deliver the hike they had promised.
  9. The market rallies hard, Shemitah shorts are eaten alive, to a higher level than late-August.
  10. The S&P 500 gets back above the 2000 level, but fails to retake the old rally channel.
  11. October.  Something breaks (bonds? yes, probably) and the Fed can do nothing but watch.  We are still at ZIRP and they have no ammo, nothing.  Fear and loathing grip the land!
  12. If the 1987 model holds, now we seek out the target defined by (1) the slope of (A) down, and (2) the delay produced by the fight during (B).
  13. Yes, it could go truly vertical, return us all the way back to the trendline between the 2002 and 2009 lows.  This would be an epic finish to Dr. Bob McHugh's "Jaws of Death" pattern.
An objection would be that 1987 only took 36% off the indexes, while what I am proposing here is a 74% crash, pretty much all at once.  It would blow through any support levels that seem reasonable -- 1500, 1100, 1040, etc. -- in a violent orgy of panic selling -- day after day after day.

I only want to suggest that something like this is possible, based on the geometry and logic of the 1987 episode, a true vertical collapse.

I mean, this is just foolishness, right?  We have recovery, and the markets are real, and the Baby Boomers are going to get paid.  Sure they are.

the un-possible true crash for the ages

No one gets out of this alive.


christiangustafson said...

It's probably going to happen and I'll by on "60 Minutes" laughing at everyone.


Bicycle said...

And that's how crude oil goes to zero, friends, however temporary...

Because a crash like this blows up your ETFs, your brokerage, halts the banking system, flow of credit, etc....

Bicycle said...

And one thing I have shown CG about this crash hypothesis, the chart of the inflation-adjusted DJIA:

The rising trendline, second from bottom. Starts in the 20's, acts as support after the depression all the way until the mid 70's, and is only violated by the Great Depression crash and the end of the 70's-80's inflationary depression.

The last time it was touched was the bottom of the 1987 crash.

It currently intersects the bottom of the Jaws of Death / megaphone trendline... roughly at CG's target.

This one echos back to the downward move off the creation of the Federal Reserve--100 years ago...

Anonymous said...

I find this type of speculation fun, but I'm not buying into it yet. 1820 is a lock though.

“Being and stability are regarded by our contemporaries as akin to death; they cannot live unless they act, fret, or distract themselves with this or that. Their spirit (provided we can still talk about a spirit in their case) feeds only on sensations and on dynamism, thus becoming the vehicle for the incarnation of darker forces.”

Julius Evola

Anonymous said...

It will be interesting to keep an eye on the media, as we head into the bear market. I wonder what kind of sensational distractions they will come up with?

christiangustafson said...

This analysis of China probably dovetails nicely with what I've suggested here.

Oh my!

christiangustafson said...

I do think that people like this guy will get exactly what they deserve in the end.

Anonymous said...

Last name Smoke. How appropriate, considering that's what he's blowing up their behind.

christiangustafson said...

Hmm, what's that spike in traffic?

Oh. I see. Cool! Yay!


Permabear Doomster said...

Congrats on the ZH posting. I thought I recognised the post title.

They'd never accept me, I'm far too bullish these days.

sooner said...

You made zerohedge!! Rock the day! Bears unite!

Bryan Franco said...

Congrats all! Up or down next week, I do think the 'big' crash is likely 10-12 weeks away.

sooner said...

Right now it's looking like it may be a down week lol

Steven said...

I thinking we are in the last stretches of the c leg. Would 've nice to have a revised graph with the new data ;)