Here’s a close-up of the Dow in October ’29. Black Thursday, the start of the heaviest phase of the crash, saw an 11% intraday loss, then a close down just 2%:
In 2008, October 10th saw the same type of action: an 8% intraday loss, then a barely negative close. In this case, the day marked an interim exhaustive bottom, since unlike in ’29 and this week, we’d had very heavy declines already:
Here is yesterday in the Dow:
I’m not making any calls here, other than to say that the market remains treacherous. Few have been converted to the bear camp, with the general consensus being that yesterday was a technical aberation. It should serve as a warning about how ephemeral equity prices can be, and how buyers can just disappear in a panic when there is no fundamental support for thousands of Dow points under the market.
The crash of ’87 happened from much lower valuations than today, and also coming off a top, though not from nearly as close to the top as yesterday. The market was overbought and overvalued on high bullishness, then buyers just disappeared. It also had a nasty Thursday from which stocks never looked back:
What is particularly worrisome about yesterday’s crash is that it happened right off a top that registered some of the most extreme bullish complacency readings in history, and that few are truly worried about further declines. It has happened during a depression, at extreme overvaluation (1.7% dividend yield), with waning market momentum after a giant bounce off a bottom (March ’09) that had none of the classic signs of a lasting low (yields were just 3.5% at best, and the low was not tested).
Keep out of this market. Hedge any long exposure you can’t get rid of.
I didn’t mention anything about computers here, which any discussion of yesterday should have. So yes, computer stop-loss orders kicked in and buy orders were pulled, but this is just what would happen with humans. Every market in the world has experienced some kind of crash this week. It’s not the machines – they basically just do what people do, but faster.
However, you can probably blame computers if you got screwed out of something during a split-second 50-99% drop — that would probably be less likely to happen in a market with human specialists to absorb order flow with their brokerage’s books. But that’s not the cause of the crash, just something that happens during a crash — buyers pull out and stop-losses kick in. In ’29 you also had solid companies selling for a buck for a few trades. That’s just the way the cookie crumbles, and one of the myriad risks of the equity market.
(BTW, breaking those trades was likely a bad decision on the part of the exchanges. If they had let them sit, those kinds of ridiculous plunges to a penny would be less likely to happen again, as everyone today would be coding away to program their bots to snap up “bargains” during the next swoon. If they could just turn around and cancel the trades, who’s going to take that risk, since you might end up short a stock trading at $20 the next day that you’d bought for $10 and sold for $15? Doesn’t anyone believe in markets anymore? Not even people who run the stock markets? Just let them be, and participants will naturally seize opportunities and add efficiency to the market.)
The cause of this crash is just an overbought, overbullish, overvalued market during a depression (9.9% headline unemployment again, 17% real).