This Crash Call's a Dud…

Barron’s is trying to ruin the bull market’s positive vibes.

Last month’s dreary “bull skull” cover story threw some serious shade at stocks, followed by a laundry list of scenarios that could halt this bull market in its tracks.

This week’s edition takes that idea to the next level. It tackles the biggest one-day market meltdown in history: Black Monday. Even worse, the hypnotic cover story forecasts computer-driven trading programs will cause the next terrifying market crash…

barrons

“The proliferation of computer-driven investing has created an illusion that risk can be measured and managed,” the article explains.

But as Marketfield Asset Management CEO Michael Shaoul says, “The system is more fragile than people suspect.”

This week is the 30th anniversary of Black Monday: October 19, 1987. Fair warning: you won’t be able to avoid the endless 1987 coverage this week. The financial media is already bombarding us with stories of the Dow’s soul-crushing 22% drop.

The hubbub is also giving the crash-callers one more reason to invoke the ghosts of Black Monday in their spooky market predictions…

Back as early as 2013, the doom brigade contended that the market was headed toward another abrupt crash much like we experienced in late 1987. The stock market has paid no mind to these dreary prognostications. While stocks have experienced the occasional hiccup over the past five years, nothing close to the Black Monday rout has reared its ugly head.

The major averages are back to their old tricks in 2017. Stocks are marching higher in lockstep formation without a hint of worry from the herd. The S&P 500 hasn’t produced a measly 5% pullback in more than a year. With the market ripping higher every week — and Black Monday’s anniversary at hand — it doesn’t seem like a stretch to prep for a crash.

That brings us to our big question:

Is a 1987-esque meltdown possible sometime in the future?

Of course.

But it’s a worry that doesn’t have to dominate your investing strategy right now.

Let’s take a quick peek into the past to see why…

First, we should put the 1987 crash into its proper context. It’s important to remember the crash itself was preceded by an extremely powerful rally that demanded a hard reset.

The bull run that began in January 1985 sparked an incredible rally lasting more than 30 months. Investors were practically drowning in gains. The Dow Jones Industrial Average jumped more than 125% in the two and half years leading up to the crash. And half the total gains were logged between January and August of 1987.

How does a runaway market like we saw in the late 1980s compare to what’s happening right now?

I know it feels like today’s market conditions are just as powerful as what investors witnesses in the late 1980s.

But if we look at the performance the major averages have posted over the past three years, we see an entirely different picture.

While we’ve enjoyed an impressive rally over the past 11 months, it doesn’t even come close to equaling the power of the 1985-87 romp. A stealth bear market ripped apart stocks for the better part of 2015 and early 2016. In fact, we didn’t see anything resembling a strong rally until beginning the November 2016 melt-up.

But maybe the Dow is poor measure of market euphoria these days. After all, it’s 2017. Technology stocks are pulling the strings in today’s market.

Yet even if we replace the Dow with the Nasdaq Composite in our example, we’re looking at returns of 39% over the same timeframe. Make no mistake, 39% returns over a little less than three years is nothing to scoff at. But to compare today’s action to the 1985-87 melt-up is a bit of a stretch.

Bottom line: I’m not seeing the insane conditions we would need for a blow-off top right now. The action we’re seeing in the major averages looks like a steady grind higher rather than a major top.

Instead of searching for reasons for this bull market to grind to a halt, we need to concentrate on our profitable trading set-ups. There’s plenty of room for stocks to melt-up into 2018…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning