Many like to compare the recent downturn with the 1987 stock market crash. In 1987 the fall was more dramatic as the market (SPI) fell 50% within weeks. From the All Time High (ATH) in 2007 until the recent low the market has fallen 46%, almost as much as in 1987, but it has taken a whole year. As history likes to repeat itself it is probably a smart thing to look at what happened after the 1987 crash!
As we can see from the chart below the market went sideways for a couple of months before it re-tested the crash low early in 1988. The first up movement after the low (crash) is sometimes referred to as a “dead cat bounce”; an unpleasant connotation that even a dead cat will bounce if it falls from a great height.
This second low can be regarded as a double bottom, which constitutes a powerful support level. And it was – until mid 1988 the market rallied, before the Bears took charge into 1989.
1987 and 2008 crash comparison
It took more than 6 years before the SPI made a top higher than the top in 1987! For long term investors in the equity market this would not have been a great period… However for a trader with the ability to adapt to changes in trend there were plenty of opportunities for profit.
There are currently a lot of expert opinions being expressed about when we will see the market hit the top that we had in 2007; the predictions vary greatly, from months to decades! However what many agree on is that now is a good time to buy discounted stocks. However this must be for the long term investors, as it is certainly not for sure that we have seen the bottom of the current Bear market.
Are we currently looking at a “dead cat bounce” as in 87-88? Well, let’s see.