October 1987 marks a period no investor could easily forget. The S&P 500 SPX 0.39% is up around 20% for 2013 so far. Faber compares that to 1987, when stocks rose more than 30% up to the same point in time. But it was in the latter half of 1987 that things fell apart. On “Black Monday,” October 19, 1987, the S&P 500 fell 20.4% in the biggest single-day loss for Wall Street in history. It marked the end of a five-year bull market, and stocks ended up just about where they started.
He noted that during a two-day period this week, as the S&P 500 nears an all-time high of 1,709, there have been 170 new 52-week lows. That means just a few companies are driving the market higher.
“The only way this market can go up is if the 10 or 50 stocks that are very strong continue to drive the market higher, with the majority of stocks having actually peaked out,” Faber says.
Of course, the 1987-crash theme is not a new one for Faber. He made similar predictions in May and February. So how many times is Faber going to cry wolf before we see this happen? Well, ZeroHedge says he may be onto something, if you look at a Hindenburg cluster that’s been happening over the last four days. This indicator warns when more than 2.2% of traded issues are hitting new highs, while another 2.2% or more are making new lows. (Read more on the Hindenburg Omen.)
Ryan Detrick, strategist at Schaeffer’s Investment Research, just happened to be looking at this very topic on Wednesday, and reached a different conclusion from Faber. He notes that the Dow industrials DJIA 0.18% was up nearly twice as much in 1987 as it has been this year, and that the “masses” are also doing different things right now versus the crash year.
“Back then, “portfolio insurance” or dynamic hedging was the rage, whereby players had concluded they did not need to hedge or buy puts in advance of a market decline – they would instead buy their protection when and if the market weakened and would add to that protection on further weakness,” says Detrick. In other words, a lack of protection trade.Plus, there was a huge bubble in a selling put premium, which basically bet against a crash, wiping out many traders in the process.
“Compare that with today’s ‘big trade’ of buying volatility to hedge against potential market losses. Now, everyone is protected from a crash, thus lowering the odds of it actually happening. VIX call options and the action in the VXX have simply been phenomenal the past few years, ” he says.
Once again, we shall see.
”There really was a wolf here! The flock has scattered! I cried out, “Wolf!” Why didn’t you come?” — Aesop’s Fables, ‘The boy who Cried Wolf’.
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