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Did the Dip in the DJIA Last Week Presage an Upcoming Crash?

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On the Silver Anniversary of the October 1987 crash, the Dow dropped 1%. An investor who lived through both shares his notes.

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It was Friday, October 16, 1987 as I looked across Wheat First Securities' trading desk only to see a stark look on the face of my second in command, Art Huprich. At the time, the Dow Jones Industrials (^DJI) (INDEXDJX:.DJI) were down about 100 points with 30 minutes left in the trading session. And as stocks swooned, I said to Art, "Today is just for practice!" Little did I know how prophetic that statement would prove.

To be sure, the "set up" for the Great Crash was almost preordained with the Dow Jones Utility Average peaking in the spring, while the Dow Jones Transportation Average and Advance/Decline figures topped during the summer months. In fact, I was actually quoted in Barron's three weeks prior to "the crash," stating, "Get ready for a waterfall decline." Accordingly, I had termed the 35% rally in the Industrials during the first nine months of the year as, "The solitary dance of the Dow," because every other indicator I monitored was diverging from the Dow Delight.

At the time, a run on the US dollar was in full swing despite a Yield Yelp for the 30-year Treasury bond from 7.5% to over 10%. Participants, however, were lulled into complacency, emboldened by the belief that "portfolio insurance" would guard them against any stock market decline. As the sagacious Craig Drill, eponymous captain of Drill Capital, writes while quoting that legendary economist Stevie Wonder:

When you believe in things that you don't understand, then you suffer, superstition ain't the way, yeh, yeh...

By that Friday's close (October 16, 1987), the senior index had lost 108 points, accompanied by record volume of 338.5 million shares, leaving participants brooding about their losses. Such broodings were amplified as the crash gathered steam over the weekend when markets in Hong Kong "melted" followed by similar slides in all of the European markets.

When Art and I arrived at work on October 19, 1987, the rout was on, exaggerated by the shelling of an Iranian oil platform in the Persian Gulf by two US warships. As the NYSE opened, there was chaos on the trading floor where the specialists were being inundated with sell orders, causing many of them to throw up their arms and simply walk away.

At the time, I was sporting a rather large position in the preferred shares of Castle & Cooke, now named Dole Foods (DOLE) (NYSE:DOLE). Those shares had closed on the previous Friday at $22, but after a multi-hour delayed opening, they were changing hands at $9 per share. Many other stocks suffered a similar fate on Black Monday as the Industrials shed 508 points (22.6%), leaving that index at 1738.74, on a record volume of 604.3 million shares, for the worst one-day percentage loss in stock market history.
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No positions in stocks mentioned.
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