A scary analog has been floating around in the last few days. Citibank FX analyst Tom Fitzpatrick postulated that the current market looks an awful lot like 1987 (via Business Insider).
First of all, Andrew Thrasher pointed out that 1987 saw a negative breadth divergence.
That’s not the case today. In fact, the NYSE Advance-Decline Line recently made an all-time-high.
A hawkish Fed
In addition, the Crash of 1987 was preceded by three Fed rate hikes in rapid succession. It had raised rates at its August FOMC meeting and those actions were followed by two inter-meeting hikes in September. The monetary policy backdrop today is nothing like 1987.
Greed vs. fear
Those of us who were in the business in 1987 will also recall that the pre-Crash era was characterized by cheap tail-risk insurance. There were numerous traders who were willing to play the “pick up pennies in front of a steamroller” game by selling naked out-of-the-money put options on the stock market. We know what happened next.
Today, Bloomberg pointed out that cost of hedging downside risk with put options is at an all-time-high when compared to call options.
Market crash predictions certainly get the clicks, but investors and traders should think critically about such Apocalyptic stories.
Let’s get real. The conditions of today’s stock market is nothing like 1987. When the dust settles, remember what I said. If I am wrong, remember Fitzpatrick and Gunn with your Institutional Investor vote for best technical analyst.
Disclosure: Long SPXL, TNA