They say history doesn't repeat it merely rhymes. If that's the case, we may be setting up for a 2007 market crash. Take a look at this 1987 stock market crash picture:

Chart 1 - 1987 stock market crash picture

Since the early 80s the stock and bond markets had been motoring along nicely. Bonds made a high in early 1986 and had been building a top formation into 1987 (not shown). Then in early 1987 Bonds moved lower out of their top formation. The weakness continued until early May when all told the Bond market received a 15% haircut.

The stock market however wasn't phased. It was quite content to plough ahead even in the face of a deteriorating bond market. In fact, once bonds made a short term bottom in May the stock market celebrated and rallied to fresh highs.

The summer of 1986 saw bonds and stocks rally together -- until July. Bonds began declining again (I'm sure the expectation was a double bottom as the stock market continued to surge).

Then came Fall (excuse the pun). Bonds broke below their May lows in September and the market finally sat up and noticed. From then on out it was Katy Bar the Door - the stock market proceeded to tumble into what culminated as the largest 1 day decline in history - Black Monday 19th of October 1987.

Fast forward to today:

Chart 2 - 2007 market crash?

Bonds made a high at 115 in late 2006 and have been trending lower ever since. The stock market likewise has been unfazed (except for a brief hiccup in March) and has been boldly moving higher.

We are now entering an especially interesting phase in relation to 1987. Bonds began their latest leg down in earnest in March at which time the stock market surged higher -- eerily similar to 1987. Now, Bonds have been staging a moderate bounce since June and if the 1987 picture is to unfold again, the minor rebound would be close to over.

If bonds turn lower (as they very well could because of the weak Dollar) I would take that as the first sign of caution. If bonds break below their June lows I would take it as a MASSIVE warning.

By Greg Silberman CFA, CA(SA)
Profession: Portfolio Manager and Research Analyst
Company: Ritterband Investment Management LLC
e-Mail: greg@goldandoilstocks.com
Website: blog.goldandoilstocks.com

I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Greg Silberman Archive

Comments

Post Comment (Moderated)

Subject:

Name:

E-mail address (will not be published):

Comment:

Commenting Issue - If on submitting you are returned to the main Index Page (50% chance) then your comment has not been accepted, Follow below steps for 95% chance of comment being accepted.

Click your browser Back button (from main index page).
COPY your comment text from Comment box (i.e. copy to clipboard).
Press PAGE Refresh - You should see the message "You are not authorized to carry out this operation"
Paste your comment back into the comment text box.
Click Submit - If everything goes okay you will remain on the article page with the message "Your comment was held for moderation and will be reviewed shortly".
If instead you are again returned to the main index page then repeat 1-5, alternatively EMAIL to comments @ marketoracle.co.uk quoting the article number.

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2011 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.