Stock markets suffered a mid-October wobble on both sides of the Atlantic, with shares dropping sharply and a sense of panic in the air.
Could this be the start of a dreaded price crash, of the sort that seem more common in the autumn than at any other time of year?
So far, prices seem to have stabilised and even recovered somewhat, although at levels below those seen at the start of October. But that is unlikely to completely sooth the nerves, not least as some unwelcome anniversaries are upon us.
Traders in the best position
The 19 October marks the 31stanniversary of Black Monday, the 1987 price crash that took everyone by surprise and affected every major stock market, other than Tokyo, which was then still closely supervised and even regimented by the country’s powerful Ministry of Finance.
The 29 October will mark 90 years since the most notorious price slide of them all, the Wall Street Crash of 1929 that ushered in the Great Depression.
What does it all mean for traders? The good news is that it is usually better, in the short term at least, to be a trader during a stock-price crash than to be an investor.
More on that in a moment.
First, how worried ought we to be by recent share-price movements?
Perhaps the most worrying aspect is that they are mirrored in all major stocks markets, suggesting trader and investor sentiment may be on the turn internationally rather than as result of special factors in certain markets.
The correlation among the different indices is striking, and it is worth looking at them in detail. London’s stood at 7,510.2798 on 3 October, hit a low for the month of 6,995.9102 on 12 October and is currently about 7,056.59.
In Frankfurt, the fell from 12,287.5801 on 3 October to hit a low of 11,523.8096 on 12 October and is currently about 11,756.72.
False dawns – and dusks
On Wall Street, the blue-chip Standard & Poor’s 500 index stood at 2,923.4299 on 3 October, hit a monthly low of 2,728.3701 on 12 October and currently stands at about 2,809.21.stood at 26,828.3906 on 3 October, dropping to a monthly low to date of 25,052.8301 on 11 October and currently stands at about 25,706.68. The broader
Tokyo did not escape this time. The fell from 24,110.9609 on 3 October to a low of 22,271.3008 on 15 October and currently stands at about 22,658.16.
This pattern was repeated in markets in , and .
How should traders react?
So, when prices have dipped substantially, and the trader believes they may fall further down, the trader will go short. This could involve individual stocks, but if the trader is convinced that a generalised price crash is in the offing, they would probably find it more efficient and cost-effective to short one or more .
Similarly, signs of a sustainable recovery in prices are the trader’s signal to go long, but a word of warning. False dawns are fairly common during bear markets and there is always a danger of being long when a downward price movement resumes, sometimes quite savagely.
To minimise loss in such a situation, it is vital to keep in mind that a good trader never, in the expression, stays married to their mistakes. Do not assume that your position will come good, or that it “owes” you anything.
Put a stop-loss in place that will automatically bale you out of a losing trade.
The same is true in the other direction, of course, but “false dusks” tend to be less common than false dawns, especially after such a long winning streak on markets.
Pointers from history
The may be an attractive alternative, although were the Federal Reserve to cut interest rates to try to stabilise financial markets, that may well cause the US currency to fall on foreign exchanges.
Today, of course, we have Bitcoin, whose value is largely unconnected with stock-price movements., such as
But the best trading strategies cannot answer the fundamental question: are we looking at a stock-market crash? Anyone who could give a definitive answer would, presumably, be too busy making money to share that answer with the rest of us.
However, there are one or two pointers from history that may help.
One is that the 1987 crash was foreshadowed almost exactly 12 months earlier by a period of sudden turbulence on world stock markets. The storm passed as quickly as it had appeared, but the omens were not good.
Finally, a good trader never confuses market volatility with risk. Properly handled, volatility can be your friend because it generates trading opportunities. It is risk that you seek to minimise, not volatility.
Oh, and no crash lasts forever. London share prices actually ended 1987 higher than they began it.