The recent stock market selloff has turned noted technical analyst Ralph Acampora from a bull to a bear. "From a technical perspective, the damage that has been done technically to the stock market is much, much worse than people are talking about," he told MarketWatch, adding, "Honestly, I don’t see the low being put in yet and I think we’re going to go into a bear market." He sees a dynamic that is frighteningly similar to that which preceded the 1987 stock market crash, some key features of which are summarized in the table below.
A Quick Look At The 1987 Crash
|The Dow Jones Industrial Average (DJIA) more than tripled in the prior 5 years|
|The Dow plunged 22% on Black Monday, Oct. 22, 1987|
|Among the 20 biggest stock markets worldwide, 19 fell by more than 20%|
|The Federal Reserve and the stock exchanges intervened to limit the damage|
|So-called circuit breakers were implemented to slow down future plunges|
Significance for Investors
A big factor in producing the 1987 crash was program trading, or computerized trading algorithms that unleashed wave upon wave of selling at speeds that previously were unknown. Today, these algorithms are even more pervasive, driving an even larger proportion of total trading activity, that a 1987-style downdraft may become even more severe.
It took slightly over 15 months for the Dow to regain its level just prior to the 1987 crash, and almost 2 years to the day to pass its then-record high that had been set on Aug. 25, 1987, per INO.com. Regarding the current situation, Acampora believes that the market may not recover until sometime around the first quarter of 2019. If so, this would represent a parallel with the 1987 crash in that both the plunge and the recovery were of relatively limited duration, compared to a secular bear market that might grind on for years.
"Honestly, I don’t see the low being put in yet and I think we’re going to go into a bear market." —Ralph Acampora, head of technical research, Altaira Capital Partners
"I'm concerned about the failure to make new highs and the failure to hold the rallies," Acampora told CNBC earlier in October. "If we start taking out those lows, I think you are going to start seeing some dramatic declines across the board," he elaborated. By contrast, in August he sounded a bullish note on CNBC, saying "for me to be really, really negative you'd have to take out that April low [on the Dow]," which was 23,344 in intraday trading on April 2. Acampora's current bearishness is despite the fact that the Dow closed on Oct. 31 nearly 7.6% above that April 2 low.
Morgan Stanley, meanwhile, sees what has been a rolling bear market, in which various sectors suffer declines in succession, turning into a cyclical bear market, in which a general downdraft affects the vast majority of stocks simultaneously. The chief culprit, they say, is monetary tightening by the Federal Reserve and other central banks around the world, as summarized in another Investopedia story. However, Morgan Stanley believes that this will represent a temporary setback for the bull market, and not the start of a secular bear market.
An extremely bearish view has been enunciated by outspoken economist, hedge fund manager and market analyst John Hussman. He also points a finger at the Fed, blaming its policy of quantitative easing, enacted to combat the 2008 financial crisis, as having created asset bubbles that are bound to pop with a vengeance. He sees the S&P 500 Index (SPX) plummeting by 60% or more, as discussed previously in Investopedia.
Given the divergent opinions among the supposed experts, it seems that the wise investor needs to prepare for the worst, taking defensive measures, while also hoping for the best, retaining some exposure to equities. Against the bearish views summarized above is a bold forecast of bull market gains extending into 2025, per Jeff Saut, the chief investment strategist at Raymond James Financial, as outlined in another Investopedia story.