Revisiting The 1987 Stock Market Crash and “Fishhooks”
One of the oldest clichés in the financial markets is “sell in May and go away”. With this comes the annual fear that the stock market may crash, especially as we approach the height of summer. Those who were trading in 1987 will certainly remember the warning and unfortunately the crash of the 1987 Stock Market. It is a lesson that is remembered and talked about to this day, with the finger of warning being pointed at current markets.
The ‘87 crash happened exactly when everyone expected it – on the 17th of October in the U.S. Stock indexes across the board dropped so quickly that the market was shut down for several hours. The sheer terror amongst traders was palpable, and in the aftermath around $500 billion was wiped off the value of stock markets worldwide.
The total one-day market loss was a full 22.7%, with the S&P 500 suffering a drop of between 20-30% in the first few minutes of trading alone. Initial reports blamed the sinking world stock markets on ‘Program Trading’ or ‘Black Monday’ but it was later revealed a more complex ‘fishhooks’ strategy was at play as the driving force behind the crash.
A fishhook is a bearish strategy that entails selling a large number of stock index futures in a certain market. It gets its name from the sharp downwards spike in the chart resembling a fishhook. As this strategy was not available to retail traders, it was mainly used by large institutional investors.
The biggest pro of the fishhook strategy is that it facilitates short selling of the market without having to have the actual assets. However, it is a double-edged sword and can cause rampant destruction at a potentially much quicker rate. Whilst it was not singled out as the cause of the ’87 crash, it was almost certainly played a significant part.
We may never know the truth behind the 1987 Stock Market crash but one thing is for sure, this event is an enduring lesson in the markets that greed can be a dangerous thing. More recently, the aftermath of the Dot-Com Bubble bursting and the 2020 COVID crash have given a stern warning that stock market downturns can be just as quick or sudden as they can be profitable.
Therefore it is best to approach the markets with caution and to allocate risk with care. Whilst fishhooks might be a quick way to make money, the risks are simply too high to entertain the chances of making a loss. Therefore, it is better to stay away from them altogether and focus instead on more sustainable and conservative market strategies that have been proven to stand the test of time.
This article has aimed to put the “Fishhooks” strategy into context with the 1987 Stock Market crash and highlighted why operating with caution is the best approach when trading in stocks and bonds.