Black Monday Stock Market Crash Returns to Haunt 2014

Chart watchers have noticed an eerie pattern - the bull market of 1982, which ended in the Black Monday stock market crash of 1987, looks way too much like the current bull market.

The stock market crash on Black Monday - Oct. 19, 1987 - was the worst one-day fall in history. The Dow Jones Industrial Average plunged 508 points - a 22.6% drop, while the Standard & Poor's 500 index lost 58 points for a loss of 20.4%.

Such a loss today would slice over 3,200 points off the Dow and about 365 points from the S&P 500.

stock market crashAnd while no one can predict the markets for certain, the chart lines for the two bull markets have given many market analysts pause.

"The bull market that started in March 2009 is now up 169% through Friday. That's nearly step for step with the rally that began in 1982," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

The reason people are getting worried now is that the Black Monday stock market crash happened 1,311 trading days after the start of that bull market. The current bull market will reach that milestone approximately one month from now.

But Fitz-Gerald isn't quite ready to hit the panic button.

"With more than 60% of today's trading driven by high-speed computers and big dark pools that are beyond our view, another 'Black Monday' is clearly possible," Fitz-Gerald said. "Whether or not it's likely is a very different issue. The far more probable scenario is a meaningful stock market correction of 5% to 10%."

That's a view shared by Jim Paulsen, Chief Investment Strategist at Wells Capital Management, who raised Wall Street heart rates by commenting on the chart pattern in a research note last week.

"I would suggest that history won't repeat, I don't think we'll have a big collapse... but could we rhyme a little bit? Maybe sometime in the next several months, good news on the economy might become bad news for the market like it did in 1987," Paulsen told Yahoo! Breakout.

Like Fitz-Gerald, Paulsen believes any correction would be closer to about 10%.

Still, some observers dismiss the matching chart patterns as a meaningless coincidence - but there are circumstantial similarities as well...

How a 2014 Stock Market Crash Would Resemble the 1987 Crash

What grabbed Paulsen's attention was that both bull markets began in similar environments.

"Both of these bull markets started in an era of utter disbelief in the future," Paulsen said on Breakout. "And both bull markets have chronically climbed a wall of worry. But in 1987, about five years in, that wall of worry started to change, and people finally started to decide that we were in a sustainable recovery. And that's kinda what's happening here today, about at the same time, in this bull market."

One other similarity the two bull markets share is unusual longevity. Historically, few bull markets survive past the five-year mark.

The current bull market hasn't seen a correction of 10% or more in 30 months, while the average is 18 months.

"A market correction is long overdue and would be a welcome sign that things are, in fact, working normally," Fitz-Gerald said. "People forget that nothing goes up forever. Markets have to buy and sell for there to be price discovery. Up and down is part of the process."

That means investors should start preparing now to take advantage of any stock market crash that might happen in 2014.

Here's what Fitz-Gerald recommends:

  • Double-check your trailing stops. If the markets do fall, you'll have the chance to capture plenty of profits, just as Fitz-Gerald describes in his Money Map Method guide. (Click here to find out about getting a copy of the Money Map Method.) If the markets rise, you can go along for the ride and raise your stops to ensure even larger profits.
  • Add an inverse fund to your portfolio right now. Fitz-Gerald likes the Rydex Series Trust Inverse S&P 500 Strategy Fund Class Investor (MUTF: RYURX) fund or the ProShares Short S&P 500 (NYSE ARCA: SH). Both, he says, appreciate as the S&P 500 falls.
  • Get your buy list ready. When markets fall, good stocks get cheap. Think Tesla Motors Inc. (Nasdaq: TSLA) at $150 or Inc. (Nasdaq: AMZN) at $250. Other companies may be similarly discounted, so investors just need to be ready to pounce.

Are you prepared for a stock market crash? What have you done to your portfolio to protect it from a pullback? Share your ideas on Twitter @moneymorning or Facebook.

One sector that hasn't needed to wait for a stock market crash to suffer a reversal is biotech. That has some critics sniping at the sector and calling it a "bubble." But those critics are looking at biotech all wrong. This is why there is no biotech bubble...

Related Articles:

About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

Read full bio