"OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February" - Mark Twain
.I remember Black Monday 19 Oct 1987 every well. Although it was 20 years ago, I can remember it like it happened yesterday. I remember being in a van with my friends and holding a bottle of coke in my hand when I heard the news that the US stock market plunged 22% in a single day. I thought my future had suddenly turned bleak and we were entering the great depression of the 80s. The newly appointed Federal Reserve Chairman a relatively unknown economist who had taken over the financial legend Paul Volcker. The last thing anyone wanted was for a new guy to be handling a crisis of this magnitude. That greenhorn was Alan Greenspan......and the rest was history.
Black Monday created a lifelong interest in financial bubbles and crashes. What caused Black Monday? According to the EMH (Efficient Market Hypothesis) for such an event to occur in my lifetime is less that winning 4D on any given weekend. There has been alot written about Black Monday since - some people blame it on computerized trading, others on the weak economic conditions. My preferred explanation of the event is that it is caused by almost entirely by psychology. In 1987 investors started to feel that the conditions were similar to 1929 and sold stocks based on this resemblance. This theory is outlined here and in George Soros' book the Alchemy of Finance, he mentioned that he sold stock ahead of Black Monday because he was shown a chart of 1929 superimposed onto 1987....the uncanny resemblance caused him to sell.
Was it coincidence that the Dow Jones Industrial fell 367 points last Friday 19 Oct 2007 on the 20th Anniversary of Black Monday? Last Friday was the 3rd worst loss in terms of points for the Dow Jones in history and caused the ST Industrial to fall by a hefty 106pts today and the Hang Seng to plunge by 1000+ pts. So what if the selloff is caused by the ghost of 1987?
Well if the falls in stock markets over the past few days are caused by bad memories of Black Monday, surely it has to recover because bad memories are transient (or are they?). What good is a theory if one doesn't use it to make money?!......
Towards the close of the Hong Kong market today, I bought HSI call options. These are financial derivatives that lets one bet on the Hong Kong market going up. Of course, I didn't bet my house, it is just a small sum....but lets put the theory to the test.