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The August 1987 peak presents a fascinating historical case of rising volatility alongside rising stock prices, a rare but significant warning signal. The 1987 equivalent of the VIX, the $VXO, exhibited behavior traders now recognize as a precursor to market stress.

Let’s break it down:

1. July 29, 1987

  • DJIA: 2571.48

  • VXO: 16.90

The market is approaching its peak, and volatility is already elevated, with the VXO at 16.90. This suggests traders are pricing in underlying fear or uncertainty while the market moves upward.

2. August 25, 1987

  • DJIA: 2722.42 (highest closing level for 1987)

  • VXO: 21.92

Twenty-seven days later, despite the DJIA advancing 150.94 points (5.86%) to its highest close of the year, the VXO rose to 21.92, up about 30%. Typically, in a healthy bull market, the volatility index should fall as the index increases, signaling confidence. However, both are rising together, highlighting increasing apprehension among market participants.

Significance of the VXO-SPX Relationship

The simultaneous rise of the DJIA (and, by extension, the broader market) and the VXO indicates that caution is in the background while prices increase. This type of divergence often signals that the market is preparing for a significant reversal or correction. It suggests that investors are starting to hedge or protect against downside risks despite the ongoing rally.

Bad things happen when the DJIA (or SPX) and VIX rise simultaneously.

And so it was in 1987 as this followed the August 25 peak in the DJIA with a rising $VXO:

Now examine the last three months of VIX Risng along with SPX making new ATHs like in 1987:

What follows an SPX High with Major Divergences from Breadth, New Highs, and the rest? Examples Below:

2015:                                                     2018:

  2020:                                                              2023:

Here’s what followed in 2015:

                               

and  2018:

and 2020:

November 2023 – Coming Soon To Screens Near You

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Study Criteria: DJIA or SPX Rallies 6%+ in Six sessions or less, then makes new lows within the next ten days.

Failed 6%+ Rallies-

1931: From May 31, 1932, Low, DJIA higher by +10.24%, Then Retest The Low 7 Days Later

1932: Twice-

  1. From the May 31, 1932 Low, DJIA traded at +10.24%, Then retested the Low 7 Days Later.

  2. From the June 8, 1932 Low, DJIA rallied 11.99% in 5 Days, Then Traded To a New Yearly Low 7 days later.

1962

  • From the May 31, 1932 Low, DJIA traded at +10.24%, Then retested the Low 7 Days Later.

  October 1929:                 October 1987:               October 2023:

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September 8, 2023 = Day 42.

1929/1987 bottoms occurred on Day 55. (Oct 29 & Oct 19)

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Full-year to this point 1987 and…                                             2023:

1987 Peak To October                                                                             2023 July Peak to now:

1929 & 1987 following the above setup:

 

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