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Invest in Crashes

September 24, 2012 – 5:04 pm

‘It was a dark and windy morning’, actually I don’t remember what the weather was like but it was morning when the worst market crash started on Black Monday, October 19th, 1987. The Dow Jones Industrial average fell 20% in just one day. It is one of the main reasons that people feel that October is one of the worst months for stocks when in fact it is one of the best months to begin investing. Of course there was the October 29th, 1929 fall which started the stock market crash of 1929. That was when the term Black Thursday was coined. Those two days gave October its reputation as a bad month. Maybe it deserves the moniker but far more stock market rallies have started in October than crashes.

After that one day crash of 20% in 1987 history has taught us that the day after and the subsequent weeks turned out to be the best time to enter the stock market. It was what we call a wash out day where all the weak hands holding stocks left the market. We have had other wash out days just not as dramatic. Usually they are described as such when 90% of the stocks fall on huge volume.

Will we get a repeat of that day? It’s unlikely but the lesson is there. Buy when no one wants to and sell when everyone has already bought. It’s too bad no one rings a bell and tells us when that happens exactly. Then again, maybe the bell was clanging loudly that long ago day. I do remember by the end of the day it felt dark, windy and gloomy.

P.S. Did you know that program trading was blamed for the 1987 crash, shades of our more recent flash crash where program trading was said to be the culprit? Of course it is more complicated than that but interesting nonetheless.

Good Trading,
Steve Peasley

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