Historically, whenever the Treasury Yields fall below zero, then recover back above zero, the US/Global markets reach some peak in price levels within 3 to 8+ months. My research team and I believe the actions of the global markets may be setting up for a future peak in price levels sometime in next 6 months. We believe this will start when the Treasury Yields cross above the “Breakdown Threshold”.
expect A Continued Rally As Long As Yields Stay Below Certain Levels
In 1998, a very brief drop below zero in yields prompted a minor pullback in the markets before the bigger top setup in 2000. This pullback in price aligned with what we are calling the “Breakdown Threshold” level on Yields near 1.20. After the Yields crossed this Threshold, briefly, in 1999, they fell back below this level and the US stock market continued to rally toward an ultimate peak in 2000.
In late 2000, Yields collapsed well below the zero levels and recovered back above zero in early 2001. Just 3+ months later, Yields had rallied above the Breakdown Threshold level (1.2) and the US stock markets had already begun to breakdown as well. This instance, the 2000-01 peak, took place after an Appreciation cycle phase prompted an Excess Phase Rally (the DOT COM bubble). The “Rollover Top” that took place near this top may be similar to what we see happen in 2021 if our research is correct.
In late 2006, Yields again collapsed well below the zero level and recovered back above zero near mid 2007. This time, Yields stalled a bit in their advance higher and clearly broke above the Breakdown Threshold in early 2008. By this time, the US markets had already moved into a sideways/rollover topping formation and began to decline sharply after the Breakdown Threshold was breached.
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What we find interesting about this research is that as long as the Treasury Yields fail to rally above the 1.2 Breakdown Threshold, the market dynamics appear to support a “melt-up” type of trend. Even though traders should understand the risks are starting to become excessive based on this type of pattern, the markets continue to push higher as long a Yield levels stay below the Breakdown Threshold after reaching the Setup Threshold. It is our belief that the Setup Threshold must be breached (to the downside) for this topping pattern to really anchor into place.
Looking at the chart below, in 1996 (highlighted in BLUE) the Setup Threshold was breached, but the Zero level was not breached by Yields. When Yields rallied back above the Breakdown Threshold, a minor sideways price correction took place (briefly). As Yields fell back below the Breakdown Threshold (while never breaching the Setup Threshold), the stock market rallied strongly – resulting in a 90% price rally before the Yields broke the zero level in 1998.
Currently, the Yields level has broken below the zero level and the Setup Threshold, thus there is a high probability that any advance above the Breakdown Threshold will prompt a moderately strong price correction in the US stock markets. If Yields continue to rally higher, we can expect the broader market to move down, possibly starting a new bearish price trend.
Depending on what Treasury yields do from this point forward, we could expect a number of different outcomes. We’ve attempted to highlight various outcomes on the chart below in different colors.
- RED: If Treasury Yields rally above the Breakdown Threshold and continue to push higher, then there is a very strong potential that the US/Global markets will enter a deep correction phase and/or bearish trending cycle.
- BLUE: If Treasury Yields rally above the Breakdown Threshold, then stall and fall back below this level fairly quickly, there is a strong potential that the US stock markets will stall and briefly contract before resuming a “melt-up/bullish trend”. This “fluttering” near the Breakdown level may be indicative of uncertainty in the markets or global central banks attempting to push capital resources into the markets to push the economy into a recovery mode.
- MAGENTA: if Treasury Yields fail to breach the Breakdown Threshold, there is a very strong likelihood that the US stock markets will continue to trend higher (in an Excess Phase mode) prompting a series of new higher closes over time. Our researchers believe we are currently within an Excess Phase topping setup. So, if Yields fail to breach the Breakdown Threshold, it is very likely that the Excess Phase rally will continue (which would be very similar to 1996~1998 in terms of potential price appreciation).
What this means for traders is that we could see very big, broad market sector moves over the next 12 to 24+ months. These charts suggest we will either see a continued price rally or some type of moderate price breakdown in the near future depending on how Treasury Yields react near the Breakdown Threshold. 2021 is going to be a very exciting year for traders – big trends, big sector moves, and the potential for a very big shift in the global markets. Now that you have this research, you can plan and prepare for the risks and trends that are setting up right now.
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Chief Market Strategist