Our yield curve model is again sounding the alarm on overpriced equities. Unless the 10Y – which closed its June 8 gap this morning – declines sharply right away, the 2s10s spread signals a sharp equity downturn to finish the correction which began on Oct 12.
The bad news for equities? A sharp drop in the 10Y also portends a correction.
continued for members…
In addition to closing its gap, the 10Y reached its SMA200 – the equivalent of almost tagging its SMA100 gap back in June when it closed its Mar 20 gap.
For months, I have assumed TPTB would force rates lower to keep the 2s10s from breaking out.
Why? Because a breakout has been associated with the worst equity breakdowns of the past 20 years. We saw it happen in February…
...just as it has happened before.
Is it possible the 10Y will reverse course and keep the 2s10s from breaking out? Absolutely. But, that scenario also means lower stocks prices – though not as ugly.
It could be the difference between another 6-8% drop and a 25%+ drop. 
Remember, NKD is very, very far into a rising wedge that suggests a 6.5% drop…
…which dovetails nicely with USDJPY’s and DXY’s weakness…
…and would help prevent EURUSD from breaking out.
This would give CL and RB a chance to reset and rationalize (the necessary) lower interest rates.
This could mean extraordinary volatility for SI and GC, which tend to do well when DXY is falling. If we follow the Feb-Mar pattern, DXY will continue falling until things get ugly, then spike much higher very quickly. This would suggest a continued rise in GC and SI, followed by a sharp drop.
Icing on the cake for bears? VIX, which had its 10/20 cross yesterday.
And, note that XLF has again reached overhead resistance after tagging a falling TL from Jun that has halted three previous rallies. Doesn’t bode well for financials or the 10Y.
UPDATE: 3:40 PM
Coming into the home stretch, ES has rebounded to the top of the falling red TL – primarily on VIX getting hammered (off nearly 3%.) Note that VIX is still in a bullish 10/20 cross and that CL/RB have broken down still further, and that 2s10s has backed off its breakout.
