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Posted on 16 September 2012 | 3,128 views

Summer of 2012 Stock Market Pattern Same as Before the 1987 Stock Market Crash

The stock market’s pattern this summer of 2012 looks similar to what transpired back in the summer of 1987.

Throughout much of August, the S&P 500 has been hovering around its highest level of the year and action in the options market has been screaming a different story. The CBOE Volatility Index, or VIX, is up 33% in just a few short weeks. Now granted, the VIX earlier this month tumbled to its lowest level in five years. At 17.64, it is still low by historic standards. But until today, the recent pickup in the VIX hadn’t coincided with big declines in stocks.

This same kind of pattern occurred at the ’87 peak. Back in July 1987, the S&P 500 was hitting new highs just as the VIX was touching new lows — then something odd happened — over the next month, the S&P continued to climb but options traders were getting skittish, and began pricing in a higher implied volatility level.

By mid-August of 1987, the S&P 500 had climbed to a new high for the year, while the VIX had quickly spiked 40% from levels seen just a few weeks earlier. Soon after, stocks started falling, while the VIX maintained high levels. The Black Monday crash happened a few months later, on October 19, 1987.

The Dow fell 23% on Black Monday and such a one-day decline isn’t even possible these days, considering all the trading curbs that are put in motion when major indexes drop 10% in a day.

Some traders are predicting multiple one-day crashes which will surpass that magnitude in ’87 — pushing the S&P 500 back to 666.79 which was set on March 6, 2009 and has never been re-tested.

But given how high-speed trading has changed the market, don’t ever discount some other type of disruptive meltdown — the dynamics that played out in the summer of 1987 leading up to Black Monday seem to be repeating again.

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