Dead Ahead: A Blowoff and a Breakdown
Posted February 16, 2021
Stocks are entering something of a blow off top.
Whether this is THE top, as in the last bull market of our lives is over, I cannot say. I’m not psychic. All I do know is that the market is forming a top of sorts. And once that top is in place, we will get a significant correction.
The market has entered a kind of parabolic move driven by the Fed’s record liquidity. You can see the slope of the rally clearly accelerating to the upside in the chart below (I’m not including the COVID-19 panic lows because that was a forced liquidation event).
Interestingly, this move is beginning right as Treasury yields are approaching the “something breaks” levels in the bond market.
I believe that when the yield on the 10-year U.S. Treasury breaks above the red resistance line in the chart above, stocks will top and the correction will begin. At this current pace, this will happen in the next four to six weeks when the S&P 500 is at 4,100 or 4,200.
It will then plunge to test its 50-week moving average as it has every time it becomes overly stretched above it. As I write this, the 50-WMA is around 3,200 but by the time the market tops I expect this line to be closer to 3,500 on the S&P 500.
Using those numbers, it means we’d be looking at a significant 16% to 18% drop in the market.
Now, the top is not fully in place, so I don’t anticipate this reversal yet. But we are definitely getting closer.
Editor, Money & Crisis