By Tim McMahon, editor
Historically whenever the 10-year Treasury yield drops 1.2% over a short period of time a bear market for stocks resulted within two months . This signal presaged steep market crashes in 1990, 2000, and 2007.
The Treasury yield signal is now flashing a major warning. On April 5th, 2010 the 10-year Treasury bond was yielding 4.01% and is currently yielding only 2.79%. So over four months the T-bond yield has fallen 1.22%. By this signal we can expect a 20% drop in the stock market over the next two months and it is possible that the beginning of that drop has begun today with a 2.5% drop. Of course it probably won’t be straight down. Elliott Wave patterns suggest a five wave pattern, which is essentially three large first waves down separated by two smaller waves up, i.e. waves 1,3,5 are large down waves and waves 2 & 4 are smaller up waves.
Logically, Why should this indicator work?
It is theorized that bond investors are more conservative than stock investors and thus less influenced by fear and greed so they tend to sniff things out a little earlier. Treasury bonds are considered safer and so even though the yield is falling bond investors are willing to buy them anyway in order to escape the crash they see coming in the stock market.
And it seems that Last week’s data bears this out. Equity funds saw a net outflow of $688 million while bond funds saw a net inflow of $2.1 billion. Money market funds got inflows of almost $14 billion so it only makes sense that the stock market will crash as all this money is being pulled out and moved to the sidelines.
Interestingly this is exactly the prescription Robert Prechter of Elliott Wave International prescribes for protecting yourself from a deflation. Cash, money markets, and fixed assets like bonds. See Survive and Prosper In a Deflation – Download the 60-Page Guide Free
Another sign of the bad market conditions is that KKR & Co. LP, the parent company of private equity firm Kohlberg Kravis Roberts, has postponed plans for a $500 million stock offering, citing unfavorable market conditions. If these guy can’t sell stock you know the market is bad.
But according to Anthony Scaramucci of Skybridge ”Most of the hedge funds I spoke with on Wednesday are only looking for a 5-10% correction.” So they see it as a short correction not a 20% massacre. But Prechter is on record calling for a major slide. On May 19th we published his Bigger Than 10% Correction Ahead article.
For more info see the Special Report Wealth Preservation in Very High Risk Times
