EXTEND & PRETEND: Shifting Risk to the Innocent
By: Gordon T Long
May 07, 2010
Markets never repeat themselves but they often rhyme. This rally feels like the same sonnet we experienced in 1987. As in a sonnet, it is following a strict rhyme scheme and specific structure.
In 1987 the rally began gaining steam in the spring when it already seemed overbought and extended. The rally had initially started in October 1986 at DOW 1400, but during the spring of 1987 it began to accelerate. It not only didn’t correct, but continued to gain momentum. Despite all the pundits saying it was about to correct, it just kept going up. By early fall the bears had capitulated and the public was scrambling to avoid missing further gains. They were quickly rewarded as the market moved even higher. No bad news, overextended fundamentals or technical warnings could stop the rise. The DOW was soon over 2700 for an approximate 93% rise.
Then suddenly in October 1987, out of nowhere, the crash hit. It was stunning. The market gave back 22.6% in one day. What was later called Black Monday left a pale over the US that was palpable. In a matter of days the market surrendered the entire gains it had achieved over the previous year.
Before you write me off too quickly as trying to draw too close a comparison, let me tell you why it really feels the same. It isn’t just the rise or rhyme; it’s the reason for both.