Myths of the Greenspan Era

The Dow Jones Industrial Average had been over 2650 in the beginning of October 1987, and over 2500 a week before the crash. Back then, volume was a more modest affair, and the chart shows 20-million-share days as average. Volume started ticking up on Oct. 13 and built gradually the rest of that week toward 60 million on the Friday before the crash. By then, the Dow had fallen to near 2200. On "Black Monday," the Dow plummeted to near 1600.

From over 2650 to about 1600 was a huge drop of nearly 40% in less than a month. That kind of peak-to-trough drop is not the sign of an invisible hand: It's a massive, capitulatory distribution that exhausts sellers. A correction of that magnitude brought out bottom-fishers -- fools and heroes alike. No Plunge Protection Team was necessary.

When the Nasdaq Composite collapsed in the year 2000, it dropped from over 5000 to nearly 3600 -- before bouncing back toward 4500. That's not an atypical bounce for such an oversold condition. If it was the work of the Plunge Protection Team, they are not very good: the Nasdaq subsequently hit 1100.

Incidentally, I was in grad school at the time of the 1987 crash, and snorted derisively when President Ronald Reagan called Black Monday "a correction." The media had a field day with it. But it turned out that a correction was all it was. Consider this my belated mea culpa: The Gipper was right, I was wrong, and the bull market continued its ascent for another 13 years.

Myth 4: The Greenspan Put

Similar to the PPT, the concept of the "Greenspan put" is alive and well today. However, it has less resonance than it might have enjoyed during the 1990s. Perhaps that 78% plunge in the Nasdaq had something to do with that.