Are you prepared to see next black swan?

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Markets are rising to new high, day after day without showing clear signs of tiredness. S&P 500, if closed above 1553, is about to create a history (Last high was March’00 when highest level it achieved was 1552.87). Dow has already done so when in crossed 11,750. Russell 2000 has done so. Nasdaq is still pretty far from the highs it achieved in 2000.

Let’s look back at history and see if there is something we can learn from it and prepare for ourselves.

Oct 1987

The S&P500 crashed from 327.83 opening to $250.78, a massive 23.5% decline. In today’s term when S&p500 is @ 1550 it is equivalent of 356 points!!! Much of the losses were on Oct 19, 1987 when S&P500 lost 20.4% in a day and in today’s terms it is 316 points!!!

On the same day Dow lost 508 points which was equivalent of 22.6%. In today’s terms that was 3,142 points!!!

Within a span of 2 weeks in the same month Nasdaq lost 32.5%. On Oct 19, 1987 alone, the youngest exchange lost 11.3% that is 305 points falls in today’s terms.

Aug 1990

S&P500 lost 14%, Dow lost 16% and Nasdaq lost 17.8%

Aug 1998

S&P 500 lost 14.5%, Dow lost 15.1% and Nasdaq lost 19.9%

Everyone knows what happened from March 2000 till Sept 2002 after which the markets pretty much started to gain and we saw great bull run and still seeing it. Now let me get to very recent and quick falls.

Feb 26th to March 5th, 2007:

S&P500 lost 5.2%, Dow lost closed to 4.2%, NASDAQ lost 7.32%, RUT lost almost same levels. The biggest drop being on Feb 27th alone when Dow dropped over 540points at one time, S&P dropped 55points

If you overlooked it, let me remind you, most of the the time black swan appeared by surprise and it happened when markets were making new highs (throughout the history of past 80 years except a few occassions).

dow-history.png Here is Dow’s chart of past 80 years. It took almost 20 years (yes, 16 to be precise) to break $1,000 mark for Dow (from 1966 to 1982). If you check S&P chart, you will find pretty much the same picture.

I don’t have much time for a detailed post and analysis on this. So let me share my message straight. We are in a bull market where everything seems to be going just fine and ideal. When is the next big fall, I don’t know? But are you ready to take that sort or plunge in a day? Going by past statistical observations, a few thousands points in Dow is very real? are you ready?

BTW it’s just coincidental that this post is on a down day. It took me quite long to collect lead data.

Think again, OP







5 responses to “Are you prepared to see next black swan?”

  1. xf Avatar

    I am not prepared for a black swan, neither are you or anyone I know.

    How do you prepare for such an event? What do you have to do?

  2. OptionPundit Avatar

    Dear XF, you are right, I am also not prepared right now.
    This discussion has already triggered in my brain and I am looking forward to strategies that can be plesantly surprised by black swan sightings.

  3. […] little over -5% and RUT was the hardest hit dropping over -7%. Interesting! I mentioned about black swan out of nowhere last week, though this is not black swan, but 4 to 7% drop is quite interesting. My […]

  4. wuming79 Avatar

    start buying long term put options?

  5. OptionPundit Avatar

    Dear Wuming, this warning was almost 2 years back 🙂 when no one was even talking about the bear markets and we all know what has happened since then. Here at OP we avoided capital erosion and in fact have been continuously building one.

    Looking at current situation, if you do want to play another black swan event, you may want to read this post ->

    Profitable Trading, OP

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