1987 versus 2007
I keep repeating I am not a fan of the 1987 parallel to 2007. I am not saying its impossible -- just less likely than other potential parallels (My choice is 1973, Doug Kass' is 1937).
Yet many readers keep drawing my attention to the 1987 conclusion. As a service to those of you who find this compelling, here is an overlay of the chart several of you have sent in.
>
Dow Industrials 1986-87 - 2006-07
> UPDATE: April 20, 2007 6:21am
This chart (courtesy of Charles) shows the scale of the run up between the two eras to be very different . . .
Dow 1987 and 2007, scaled to 100
click for larger graph
Wednesday, April 18, 2007 | 01:30 PM | Permalink
| Comments (84)
| TrackBack (1)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d8341c5f0b53ef
Listed below are links to weblogs that reference 1987 versus 2007:
» Machine Vision Vs. Human Vision from datawink
A blog entry from Vix and More wore asbestose gloves to deal with an entry from The Big PIcture submitted by users about a cliff diving chart from 1987 that seems similar to 2007. Being a fromer grunt, I hit the mouse and banged the url looking for do... [Read More]
Tracked on Apr 19, 2007 3:13:27 AM
Comments
Barry - have to say I was with you but if one believes that patterns ar truth and repeat that's a scary chart. Just for us learning- and memory-impaired types could you re-fresh us on what's different about the economy ? And what's different about the markets ?
To my understanding we had a major inflation worry with growing credit problems on the first. But Black Thursday ?
Posted by: dblwyo | Apr 18, 2007 1:37:46 PM
printing machine wont allow this happen
Posted by: baris | Apr 18, 2007 1:43:49 PM
"printing machine wont allow this happen"
...but didn't the printing machine exist in 2000, and it happened?
Posted by: R | Apr 18, 2007 1:54:23 PM
I generally agree with BR posts but I have to say, I have been in this business for 20 years and I find historical parallels like this to be a total utter waste of time. Every market is different, and the structure of the market bears no resemblance to 1987, 1937 or any other time in history.
I am as skeptical of this market as anyone, I just don't think any of this "analysis" has any predictive value.
Posted by: Jay Weinstein | Apr 18, 2007 1:55:36 PM
Jay - I'm not a fan of the 87 parallel either, but I disagree it's an utter waste of time for two reasons:
1. The price/time/volume patterns are a representation of the thoughts and actions of people, and people have a tendency to respond in similar ways to a later instance of a set of circumstances.
2. There are those who look for patterns and expect them to repeat. By acting on that expectation, they influence the events they were antipating.
Anyway, that is one spooky chart.
Posted by: Estragon | Apr 18, 2007 2:09:56 PM
In 1987 the market was massively overvalued -- the S&P 500 PE on trailing earnings was 22 before the crash when the standard relationship of the PE to rates and/or inflation implied that the PE should have been around 14. All the 1987 crash did was eliminate the massive overvaluation and take the market back to a fairly valued range.
Now these same relationships to rates and/or inflation say the market is fairly valued.
In 1987 we had "portfolio insurance" a new hedging technique that called for managers to sell into falling markets. But the concept had never been properly stress tested and we found out that when too many people tried to use it at once it didn't work because it just drove the market down.
Maybe we have something similar out there now in all the new ways to slice and dice risk, but as in 1987 we will not find out what it is until it is too late. In 1987 there were people warning that portfolio insurance would work the way it did, but they were generally ignored. Do we now have some specific new management tool or practice that many people are warning us about?
Posted by: spencer | Apr 18, 2007 2:14:53 PM
And if the very improbably happened and the trends continued to be similar right over the edge, what would you think then?
Posted by: wally | Apr 18, 2007 2:15:49 PM
moral of the story....take heed when the major indices break below the quarterly low with continued follow-through downward.
Posted by: johntron | Apr 18, 2007 2:17:38 PM
I'm just a simple country lawyer, but isn't that chart a bit misleading? It would have been great to scare the crap out of everyone right after the dip 7 weeks ago, but the chart is now missing another leg up past 127500.
Posted by: LAWMAN | Apr 18, 2007 2:21:28 PM
re. the above comment.
I believe that is BR's point. Juxtapositions are useful, but only to a very limited extent.
Posted by: johntron | Apr 18, 2007 2:29:10 PM
So where's the part of the chart where the indices subsequently recover in relatively short order and then make new highs? I think I'd have to go just about 'all in' if we really see a drop like that.
Posted by: KB | Apr 18, 2007 2:30:42 PM
Patterns of denial, acceptance and other behavior in individual humans can follow extremely predictable patterns; patterns of history can rhyme.
How perfect is the rhyme?
Posted by: wally | Apr 18, 2007 2:32:59 PM
Spencer,
I would say that the Yen carry trade could be the "specific new management tool or practice that many people are warning us about".
Posted by: Sponge Todd Square Pants | Apr 18, 2007 2:51:43 PM
Naturally, there are infinite analogs to draw from and extend to absurd/logical (depending on your view) conclusions. If you like the 1987/2007 analogy....
overlay a chart of $INDU starting 8/7/64 (Gulf of Tonkin Incident) with a chart of $INDU starting 3/20/03 (Iraq II). By that analogy, a decline should be setting in soon similar to late 1968.
Presumably under this theory, the inflationary pressures of war spending + expanded entitlements will harm the current US economy just as Vietnam/Medicaid/War of Poverty made the early 70s a bummer.
Posted by: johntron | Apr 18, 2007 2:52:46 PM
you can always find elliott wave patterns that will match the present ones, herd psychology being what it is, but they don't usually resolve in exactly the same way. that makes the overlapping chart thing both unremarkable and not really predictive except in a general sort of way (e.g., yes, we're likely due for a pullback of some sort).
still, it does give one the willies, doesn't it?
Posted by: dark1p | Apr 18, 2007 2:54:08 PM
-)Stocks floating on a sea of cash (check)
-)rising global int rates (check)
-)fallng $ (check)
Now all we need is James Baker saying he'd like to see a lower $. oops! (Sept '87)
Only thing we didn't have in 1987 was panic behind the scenes;
High Court steps into US subprime crisis - FT
Posted by: tjofpa | Apr 18, 2007 2:54:55 PM
Not much scientific evidence to support it, but whenever NYC has made plans to start the 2nd ave subway, the U.S has went into a recession. Sept 29 1929(crash was a month later) that was the first time, Oct 1972 and March 1973 was the second time. We were in a recession on Nov 1973. Now we just started work on it April 12th. Lets see what happens
Posted by: costa | Apr 18, 2007 2:56:16 PM
I forgot....since the Bears lost, is that good or bad for the stock market? haha.
Posted by: johntron | Apr 18, 2007 3:00:07 PM
BR, I know you do not like the Fed equity valuation model. However, the Fed model accurately signaled a red flat that stocks were unusually expensive versus long bonds in 1987. Today, earnings yields are cheap relative to the 10-yr bond. I suspect this is a key reason for equities performing so well during the past year - as well as why stocks tend to skake-off bad news so easily.
Posted by: dan | Apr 18, 2007 3:10:02 PM
In 1987 we had a sound economy and comparatively cheap stocks.
While I think that a chart like this is nothing more than an amusing curiosity, it is important to remind people of the risk that stocks entail - years of gains can be wiped out in a few days.
Posted by: super-anon | Apr 18, 2007 3:10:03 PM
Barry just posted this to get us to new highs, right Baar. Went 100% long did u?
Hey, Its just like the old days;
BA,CAT & UTX leading the charge.
Did we start another war somewhere?
Posted by: tjofpa | Apr 18, 2007 3:18:51 PM
Fresh new highs again...Pretty sad when the SPY leads the advance
What's this 18 or 19 consecutive days of below average volume?
But up they go......
Ciao
MS
Posted by: Mulsanne | Apr 18, 2007 3:29:12 PM
Fresh new highs again...Pretty sad when the SPY leads the advance
What's this 18 or 19 consecutive days of below average volume?
But up they go......
Ciao
MS
---
This is similar to comments on weather boards, where weather weenies "pooh-pooh" lake effect snow as "fake snow".
Posters on these threads have been pooh-poohing the market everytime it hits new highs...which is been often this year...and pointing out problems (such as low volume). Regardless, last I checked the money in my account generated from the market moving up is real...just like the mountains of "fake snow" that pile up in Tug Hill, NY.
Posted by: LAWMAN | Apr 18, 2007 3:42:45 PM
I am always hoping for a downturn, just before I buy more of my long-term holdings!
Posted by: Zachary | Apr 18, 2007 3:44:57 PM
Lawman-
I'm so friggin happy for you....
Facts speak for themselves. IT is still on lower volume no matter which way you try to spin it. Just so you don't make the same mistake as other's here...this is a blog that talks about reasons for economic activity and uses indicators to give us a rationale perspective on why the market goes up or down.
All I see in your post is chest-thumping. Like the world needs more of that.
have a perspective or don't post.
Ciao
MS
Posted by: michael schumacher | Apr 18, 2007 4:06:28 PM
