Stock prices are based on the perceived value of the company or investment they represent. 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.
Humanity is being confronted with the same problems as those at the end of the second industrial revolution such as decreasing stock exchange rates, highly increasing unemployment, towering debts of companies and governments and bad financial positions of banks.
Despite fears of a repeat of the 1930s Depression, the market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22. It took only two years for the Dow to recover completely; by September 1989, the market had regained all of the value it had lost in the 1987 crash.
Generally speaking, crashes usually occur under the following conditionscitation needed: a prolonged period of rising stock prices and excessive economic optimism, a market where Price to Earnings ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants.
Investors were infatuated with the returns available in the stock market especially with the use of leverage through margin debt. A stock market crash can be distinguished from a bear market by its characteristic sharp decline in stock prices – which can be any double digit percentage – that happens over the course of a few days. After that starting from the September 20, 2008 we still see negative money flow, yet the trading volume is dropping and the number of investors leaving the marked reduces (the red SBV areas become smaller and smaller). Starting from the middle of September 2008 we had records in daily trading volume. The Dow Jones Industrial Average nearly doubled, rising from 191 in early 1928 to 381 by September 3, 1929. Once the VIX breaks above 20, the index is signaling that investors are concerned about the market.