Stop, Drop, & Roll
Looking at the 1987 crash 1 day at a time before the crash.
Looking at the 1987 crash 1 day at a time before the crash.
This is an exercise in in Stops where I imagine I'm invested in the S&P 500 during October's famous 1987 crash. While many of us use stops in our regular market accounts how many of us use them in TSP and more importantly how are they defined?
So it's Monday October 5th, 1987. I was 14 at the time and hair-metal ruled the world. We recently crossed above September's swing high and although the 20 SMA had crossed below the 50 SMA, prices were trading above both so all seemed normal.
The next day you lose -3.87% and close below both the 20 & 50 SMA but you think nothing of it and nobody wants to sell for a lose right? Now it's 3 days later on Friday October 9th and you've just taken a -6.42% haircut from the top. Although prices have closed below the 100 SMA, you're sure this is where we put in support and bounce off a double bottom and you'll regain all you've lost.
Fast forward 3 trading days later and it's Wednesday October 14th. You're double bottom just failed but you did manage to close just below the 150 SMA. You "hope" this where the market fights back because you're so far down the rabbit hole there's no point in getting out now or is there? You've now lost another 1.87% for a total of -8.29% THIS HAS GOT TO BE THE BOTTOM!!!
Now it's Thursday October 15th and you've just closed under the 200 SMA and lost another -2.34% for a total lose of -10.63% This is the 200 SMA this has to be where we bounce I SWEAR IT, I WILL IT, I HOPE!!!
Fast forward to Tuesday October 19. Prices closed at 224.84 and in 10 trading days you've lost -32.29% nearly a third of your fortune. Although you get a 38.2% retracement within a week, it will take you 22 months to fully recover prices.
We have a lot of new member's here and I'd hope they can learn from some of our collective mistakes, like in 2007. There are many ways to formulate a plan to overcome such a situation, you could use a mental stop, or DCA down. Whatever your plan just be sure to have one or you could get caught off guard like everyone was in 1987.
