Breakout

Are Stocks Heading for a 1987-Style Crash?

Breakout

A year ago, Wall Street pundits and prognosticators were busy marking the 25th anniversary of the great stock market crash of October 1987, and speculating whether it could happen again to a market that had doubled over the prior three years, despite a weak underlying economy.

While October 2012 ultimately saw the Dow Jones Industrial Average (^DJI) decline by about 2.5%, that was nothing compared to the 22% one-day wipe out that crushed the market two-and-a-half decades earlier.

Today, with the Dow up more than 2,000 points since last October and trading at record highs, fears are rising that the red hot stock market could be setting up for something sinister once the summer slow season is over.

"I do not believe we are going to have a one-day, twenty percent crash, like we saw in '87," says Paul Schatz, president of Heritage Capital, in the attached video. "However, I do think we're building towards a peak." He believes that peak will mark a ten to 20 percent decline.

Specifically, Schatz thinks a new market top could be set in August or September, that would play into a number of seasonal factors that have made the tenth month a tricky one, albeit one that the Stock Trader's Almanac shows has averaged a 0.4% gains for the Dow since 1950, which is better than five other months.

"October has been unfairly punished," he says, "but if we do have a decline I think it will (lead to a) bottom in October and possibly to another rally and bigger opportunities later on."

For what it's worth, to match the 508-point calamity that rocked the Dow in 1987, the blue chip benchmark would now have to shed more than 3,400 points in a single session.

Enjoy your summer.

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