One of the more compelling relationships I recognized over the years is what I have dubbed our Yield Curve Model. Simply stated, it pointed out that every time the 2s10s broke down below significant support, stocks would suffer. But, the bigger disasters – think 2000-2003 and 2007-2009 – occurred when the 2s10s broke out after inverting.
We got our latest inversion last August after a series of breakdowns and minor breakouts, each of which visited downturns on the major averages. The biggest breakout, however, occurred yesterday, when 2s10s soared as high as 73 bps. It has since settled lower, but remains broken out — a signal that we might very well be headed for a GFC style crash.
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