On October 29, 1929, Black Tuesday hit Wall Street as investors traded some 16 million shares on the New York Stock Exchange in a single day. Besides the dramatic effect on investor psychology, the stock market crash of 1929 contributed to the creation of a variety of new laws, organizations and programs designed to improve the country’s infrastructure, further social welfare and prevent corporate fraud and abuses.
However, if, like most people, you are not comfortable watching your account balance plummet, and don’t have to patience to wait up to a decade for it to get back to even, then you need to have a strategy in place for when you’ll sell to get out early in crash.
The years preceding the stock market crash of 1929 were filled with irrational exuberance Stock prices had risen across the board, even for companies that posted little profit , and investors were very optimistic that the general upward trend of the market and the economy would continue for some time.
This magnitude is broadly in line with previous finings by, for example, Kezdi and Willis (2008) The post-crash relationship is just the opposite; there, the coefficient implies that the same one per cent increase would be followed by a drop of 0.4 percentage points (=0.335-0.721).
This strategy could be based on technical indicators, like a stock crossing below its 50-day moving average, or it could be based on a price/value indicator, like if a stock drops more than 10% from it’s high, or your if portfolio loses more than X%.