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This year, markets have been volatile. Stocks tumbled into bear market territory and hit many people’s brokerage accounts in the process.
And many people are worried about the future, with inflation fears and interest rate hikes still on the horizon.
But I’ve been through this – and worse – before.
In fact, early in my career, I lived through the worst crash in U.S. history: Black Monday.
I’m happy to say that we’ll never see a day like Black Monday again.
But that doesn’t mean we can’t learn something from it for our current environment… especially given what I see coming…
The Worst Crash
As a reminder, Black Monday is when the Dow closed down almost 22% on October 19, 1987. It was the largest one-day drop in its history.
There was so much volume in the market, the computers got overwhelmed and shut down. The entire market stopped for hours at a time. Traders left the floor and wandered the streets without a clue of what to do.
It was complete pandemonium.
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Of course, hindsight is 20/20. But we all should’ve seen that crash coming…
During the entire month of July 1987, the market only had one down day. It just kept going higher and higher. Euphoria was setting in.
It was a classic overextended condition. But most folks didn’t recognize it at the time.
Then, seemingly out of nowhere, it became a little more volatile in August.
It didn’t seem like much to worry about at the time. The market was still up about 25% on the year.
But then September brought even more volatility.
And by October, leading up to the crash, volatility was ramping up…
An Especially Volatile Day
The Friday before the crash, the market got crushed and finished near the lows.
By Monday morning, it was a total crash… Completely nuts.
Back then, I was trading at Fossett Trading Company for a guy named Steve Fossett, who was an unbelievable investor.
On the trading floor, I was short six put options and six call options. At the time, that was a big position for me. And the market just kept going down…
I initially sold the puts at $6, and I sold the calls at $6.
I wound up buying back the puts at $60… a loss of $54 per contract.
When the market goes down, generally call options go down, too. But since it was so volatile, call option premiums actually rose.
With all the volatility, these calls went to $50. If I’d bought them back at that level, I would’ve been crushed.
But I plainly told Fossett I didn’t want to buy the options back because it was just ridiculous, considering the action that day…
I got away with it.
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And I’m glad I did.
The market went up 500 points the Tuesday after the crash.
The calls I sold for $6 went from a massive loss of $50… to $1 per contract.
I’m lucky I got to hang on. If I had been forced to cover those calls at $50 the day before, it would’ve blown the account to zero.
The market inefficiencies were just complete mayhem. No one knew how to react…
There was a period where all trading activity basically stopped.
When the afternoon rolled around, there were more people outside the exchange than inside. People were freaking out and walking around aimlessly.
There was no market. The exchanges weren’t functioning. If you wanted to sell a stock, you couldn’t. The system totally crashed. The game was over… the market was closed.
So, we basically stopped working in the middle of the day.
Then on Tuesday, the market opened up, and investors got robbed. Stocks opened significantly higher than where they closed and came pretty much all the way back to Friday’s lows.
Why We’ll Never See Black Monday Again
The good news is, these days, I don’t think an event like Black Monday would be allowed to happen.
With the circuit breakers we have now, it’s basically impossible.
The Federal Reserve just steps in and accommodates. The market closes automatically if things fall too far.
There would be panic, but now there are safeguards to that panic. If you stop the market from trading, people go home and clear their head.
Drastic behavior just wouldn’t continue the way it used to.
After all, I believe in the mantra that “the market never does the same thing twice.”
But the market can still experience massive shocks, and with the current volatility in the markets, I see one happening soon.
That’s why I’m preparing an Urgent Warning for readers about a market event that’s guaranteed to occur just days from now.
We’re coming up on another volatile period… and a massive shock in one of the market’s largest exchanges.
Unfortunately, most people will be caught off guard.
But as we speak, the biggest players on Wall Street are preparing for it.
And next week, I’m going to show everyone how to do the same.
I believe this coming shock could help put everyday folks “back in the black” for the year if they’re prepared.
I’ll share exactly what’s coming… and the single ticker that could help us flip this situation to our advantage.
Regards,
Larry Benedict
Editor, The Opportunistic Trader
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