What caused the '87 Crash?

[kwtrade]

I looked into that just the other day...


The scary part is that no one is really sure. For me that say to be ready at any time for a similar event.

http://en.wikipedia.org/wiki/Black_Monday_(1987)

This link to to the causes of Black Monday.

 

[stock_trad3r]

moment of reversal was triggered by excess of sell orders in too short of time interval triggering a Phase 4 chain reaction (Phase 6 is the worse in which the value of the security loses 100% of its value and goes to zero ).

 

[infolode]

On option expiration each month there are hundreds of thousands of puts and calls on the SPY and most of these are naked with the intent of the arb community to drive the SPY index to the ONE LEVEL where the vast majority of all put and call premiums will expire worthless and the speculators will get wiped out.

Most big firms sell NAKED puts and calls. They never buy premium outright because 90% of all puts and calls expire worthless. (That statement should raise the hackles of the options players.)
It's a suckers game created for the public.

With the arbs deep pockets they can easily force the market (raising hackles part II) to any price level they need on options expiration to ensure that all the premiums sold have become worthless.

Once every six years or so an institution has a legit sell order on the expiration and those hundreds of thousands of puts spring back to life.

What the firms sold @0.75 are now 2.00 and since they have sold a zillion of them if they don't cover, they'll go broke.

This is what causes the crashes like in 1987 or 1998.

In the normal expiration as long as the out of the money puts and calls are reasonable like 0.30 or so , the market will regress to the mean and they will collapse to zero premium.

 

[Comptalk]

Nevertheless, 87 would most likely not happen again with the breakers in place. Thus, if this would happen, the market breakers would kick in. However, I think if Big Ben cut the rates, it would be worse. October, when the rates for the interest only morts. come due, that would be a bigger problem. Not sure how to play the market, so I am long on certain stocks, short on indexes and certain ETFs. Cert. finance and broker stocks too.

 

[efficiency]

Quote from Bullz n Bearz:

Anyone know? It couldn't be because price was too overvalued..

A crash is an orchestrated event. In motion before the opening bell. Can you say gap?

Volume, aka order flow, can be induced. Hmmm, replenish inventory? Can you make the distinction between fixed and floating supply? Most stock doesn't float, but it is marked to market.

But............. the alibi for gaps en masse that day was James Baker's speech in Germany over the strength/weakness of the US dollar. The alibi in 1989 was United Airlines. I'm scratching my head as to how UAL impacts all the other stocks out there. Note I used the word stocks rather than companies. I think you probably know the story on 9/18/01's "V" bottom.

Over-valued? Under- valued? When exactly is any security fairly valued? What metrics does one use to gauge value? Doesn't that make the kind assumption that accounting is kosher? Does one translate a P/E to an earnings yield and then compare it to a risk-free T-Bill? What about the rest of the yield curve? Is a yield curve dynamic or static? Wouldn't valuations be mechanical and hence disregard the human element? The latter being the specialist and.........the supply/demand for paper merchandised to the public, another human element.

 

[dont]

Quote from efficiency:



Over-valued? Under- valued? When exactly is any security fairly valued? What metrics does one use to gauge value? Doesn't that make the kind assumption that accounting is kosher? Does one translate a P/E to an earnings yield and then compare it to a risk-free T-Bill? What about the rest of the yield curve? Is a yield curve dynamic or static? Wouldn't valuations be mechanical and hence disregard the human element? The latter being the specialist and.........the supply/demand for paper merchandised to the public, another human element.

Price is what you pay value is what you get. The two are not necessarily linked

 

[efficiency]

Quote from dont:

Price is what you pay value is what you get. The two are not necessarily linked

This is a trading site. Consequently, value, however it's defined or quantified, isn't in my lexicon. Apparently it's in yours.

The entity most married to a security, day in , day out, perpetually probably isn't too concerned about "value" except as convenient/coincidental excuses to move his paper. Treats this paper no different than eggs or fish. Inventory. There is one distinction. In merchandising, most clamour for rising rather than falling prices.

Paper? NO? Look at a balance sheet. Carried in capitalization at par. After public, fluctuation doesn't benefit a company (other than perhaps to peg reward options). Only return from a company, is a dividend (if any). Remaining return stems from the greater fool theory.

 

[ArchStanton]

Quote from nutmeg:

Throw in my .02 but I thought the tipping point was some guy from the fed (John?) over the weekend told the Germans we wouldn't support the dollar. Bad timing (weekend) for the news.

Yes. Treasury Secretary James Baker III made the statement over a weekend that the US was prepared to "let the dollar slide".

There are a few who directly blame his mouth for the debacle. Tudor Jones, Jim Rogers, Sperandeo, to name a few, have been quoted saying as much.

Whenever Baker gets near a microphone the markets dive! During the post 2000 election legalities Baker was consulting on behalf of Governor Bush. Whenever he was on air making a statement, the markets were diving!

Now, today (Aug. 2007), it's no secret that the US is and has been prepared to let the dollar really slide. No secrets.

Quote from Comptalk:

Nevertheless, 87 would most likely not happen again with the breakers in place. Thus, if this would happen, the market breakers would kick in.

Breakers in themselves tend to act like magnets. They tend to draw the market to the "breaker" price. People don't want to be locked-limit. They'd rather stampede to the exit.

Breakers only work by allowing time for the fed to convince the market that corrective action is on the way. If no action is taken, then the breakers would be pretty ineffective.

Arch

 

[Lights]

it happened because all bull markets experience steep selloffs at their peak.

Quote from Bernoulli:

I recollect it was Jim Baker.

But the setup happened long before that: rates had been rising since Spring but had been ignored and the market was in a bit of a bubble. (A few people including Paul Tudor Jones had modeled a comparison of the movement leading up to the '87 crash to the price movement in '28-'29.) Throw in portfolio insurance also, which lent an air of invincibility to the market, and which failed miserably as liquidity dried up.

 

[stock_trad3r]

there is always atleast SOMEONE who predicts every crash