Warning Sign: The Last Time This Happened In Stock Markets An Epic Crash Followed

Warning Sign: The Last Time This Happened In Stock Markets An Epic Crash Followed

 

The Dow Jones continues to hit record highs and yesterday it reached a milestone not seen since January of 1987.

Back then, the band Starship was at the top of the charts with their hit song Nothing’s Gonna Stop Us Now, which appears to also be the rallying cry of Wall Street, Main Street and 1600 Pennsylvania Avenue today.

Of course, for those who are familiar with their history, that year didn’t end up so well for investors. On ‘Black Monday’, October 19th, 1987, the U.S. stock market suffered the largest crash in history with the Dow Jones losing 22.6% in value, amounting to roughly $500 billion in losses by the end of the trading day.

And if the exuberance of 1987 is any guide, we may be looking at a similar set of events over the course of 2017:

The Dow finished with a more than 30 point gain Thursday and hit its tenth record closing high in a row.

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But what makes this rally truly historic is the fact that the market is also continuing to hit new highs during this epic run. That hasn’t happened since Ronald Reagan’s second term.

The Dow wound up hitting 12 consecutive records in January of 1987, and it went up 13 straight days overall.

Of course, market historians might ominously note that 1987 was also the year that the stock market suffered its worst one-day drop ever. (CNN Money)

The records in and of themselves aren’t necessarily an indicator of a coming crash, but they should certainly be raising warnings signs, especially considering that many experts, including traditional bulls and bears, are noting that markets have gone up too high, too fast.

“We’re due for at least a rest, if not a correction. We’re way overbought,” said Steve Massocca, managing director with Wedbush Securities. Massocca said the market will continue to focus on data, with a truck load of reports next week on everything from fourth-quarter GDP to inflation and auto sales. The other focus, of course will be on Washington. (CNBC)

But don’t take our word for it. Here is what the Federal Reserve had to say about stocks just a few months ago, before we started breaking historical records like we did on Thursday:

Finally, the chart below shows the median price/revenue ratio of S&P 500 component stocks, which recently pushed to the highest level in history, exceeding both the 2000 and 2007 market peaks. In recent quarters, the broad market has deteriorated, even in the most reasonably valued decile of stocks, but the most richly valued decile has held up for a last hurrah, as it did near the peaks of previous bubbles. This dispersion has created a headwind for hedged-equity strategies in U.S. stocks, particularly value-conscious strategies, but investors should understand that beneath the surface of this short-term outcome is singularly the most extreme point of overvaluation for the median stock in history.….more here

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