Could You Have Spotted Black Monday, The 1987 Stock Market Top? Yes, Here's How

Last year, market observers had chattered for many weeks, if not months, about the 30th anniversary of Black Monday.

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Monday, Oct. 19, 1987, was the crash heard around the world. The Dow Jones industrial average fell a record 507 points, or 22%. The Nasdaq composite sank 46 points to 360.21, down 11.3%. Volume screamed higher on the Big Board and on the all-electronic exchange.

Due to circuit breakers built into the U.S. financial exchanges today, such a large decline on a single trading session is less likely now. Yet a careful study of the price-and-volume action in the weeks preceding that crash 30 years ago will help IBD readers today spot future bear-market declines and move quickly into cash for safety.

Why? Human nature hasn’t changed. Institutional investors still move in herds. Fear is still a major driver of stock prices.

The Big Picture column focuses on spotting heavy distribution (sessions of unusually intense professional selling). It can take just four or five such distribution days before a bull market ends and a bear market begins.

How The 1987 Crash Developed

Let’s study what happened in 1987. The first three months of the year were splendid; the Nasdaq jetted from 348 on Jan. 1 to 430 on March 31, up 23.6%. No wonder, then, the Nasdaq pulled back mildly the next seven weeks. It fell 8% off its 52-week peak, then resumed its climb.

But in mid-August, distribution days started to appear, beginning with a 1.1% drop to 446 in higher turnover on Aug. 18 (1). In a distribution day, the index must fall at least 0.2% and volume must rise vs. the prior day. Eight sessions later, the Nasdaq slipped just 0.3%, but volume rose (2) — distribution day No. 2.

Watch For Negative Reversals

The chart shows that the overall action appeared relatively quiet. But on Sept. 1, the Nasdaq reversed from a new high to fall 0.5% in higher volume (3), then scored a 2% loss in heavier turnover on Sept. 8 (4), right after Labor Day. That was four distribution days in the space of 15 trading sessions.

The market had topped.

After a mini-rebound from Sept. 22 to Oct. 5, more distribution days arrived.

The Dow Jones industrial average acted more or less the same. It chalked up numerous distribution days on Aug. 18 (-1.7%), Sept. 1 (-2%), Sept. 2 (-0.3%) and Sept. 8 (-0.6%). Then on Oct. 19, the 30-stock average collapsed. At the next day’s low of 1616 on Oct. 20, the Dow had dropped 41% from its Aug. 25 peak of 2746.

The Stock Market Today

Where are we in the fourth quarter of 2018?

On Thursday, Oct. 4, the Nasdaq notched a heavy distribution day, as noted in The Big Picture. That gave the leading U.S. equities benchmark a ninth distribution day in recent weeks. Thus, the overall market outlook changed.

What to do next? Keep reading the Big Picture column, checking the market’s status in the Market Pulse table, and studying the bullish and bearish action by leading stocks such as those in the IBD 50.

Your own portfolio of equities will serve as a good barometer of the market’s health too. And don’t forget to exercise the golden rule of investing when it’s warranted.

A version of this column first appeared on June 23, 2017. Please follow David Saito-Chung on Twitter at @IBD_DChung for more on major averages, growth stocks, chart analysis and financial markets.

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