The stock market crash of 1987(also known as Black Monday) began on the 19th of October, 1987 when stock markets in many countries in the world crashed. It started in Hong Kong and reached Western Europe, spreading to the United States after several markets in the world had already declined significantly. During this period, the DOW Jones dropped by 22.61 percent.
One major reason given for this financial upheaval was the computerized selling by program trading. But the largest price drops occurred when the trading volume became light. Swift stock executions are performed by computers during program trading based on foreign inputs. A particular strategy was adopted using program trading in a bid to affect portfolio insurance and arbitrage strategies. The utilization of program strategy became very popular among Wall Street firms as computer technology grew in prominence. After the crash, a lot of people blamed it on the strategies of program trading as stocks were sold even when the market crashed, leading to more market decline.
Some economic pundits were of the opinion that the crash itself was a reaction tilted towards return to normalcy caused by program trading activities before the crash. Indeed, most of the blame on the 1987 crash was put on program trading.
Some other economics indicted not only program trading but also other internal and macroeconomic issues such as fears about inflation and international dispute on foreign exchange.
Some of the internal reasons were portfolio insurance and innovations with index futures. The Chicago’s futures market was even below the stock market and investors tried to arbitrate it. As people were trying to sell their stocks at the New York market, portfolio insurers were equally trying to sell theirs as well.
Another economics Richard Roll opined that program trading was not the major cause of the crash but the nature of the international stock market back then. He supported this argument by pointing out that program trading was only carried out in the United States, and as such, the market crash could not have affected countries like Hong Kong and Australia, if program trading was the prime cause of the worldwide market decline. In fact, before the crash reached the United States, the stock market of some other countries have significantly declined. Another reason given for this crash was the disagreement in monetary policies of the G7 industrialized nations.
From the above, it can be seen that the cause of the stock market crash of 1987 was a combination of several factors which were both internal and external in nature.
The only way to prevent yourself from getting caught up in a crash like this is to understand and obsess over stock market trend analysis.