History suggests markets bottom after the yield on the 10-year treasury note drops significantly. The implications are ominous.

Nasdaq 100 Index vs 10-Year Treasury Note Yield, Data St. Louis Fed, Chart by Mish

Inspiration for this post comes from a Tweet by Danielle DiMartino Booth posting a thought from Dave Rosenberg.
 

Top Idea of the Month

“Over the past five decades, only when the 10-year T-note yield plunged 135 basis points (on average) did the S&P 500 manage to make a bottom."

The St. Louis Fed does not have much S&P 500 data for some unknown reason, but it does have Nasdaq data from 1986 on.

I started the chart with 1998 because the scale prior to 1998 is hard to read.
 

Nasdaq Peak to Trough Analysis 1998-Present 

Nasdaq 100 Index vs 10-Year Treasury Note Yield, Data St. Louis Fed, Chart by Mish
 

Peaks, Troughs, Yields 

• The Nasdaq peaked on March 27, 2003, declining 75.68% while the 10-year-yield fell 1.63 percentage points. 
• The Nasdaq peaked on November 13, 2007, declining 49.48% while the 10-year-yield fell 1.37 percentage points. 
• The Nasdaq peaked on February 20, 2020, declining 27.35% while the 10-year-yield fell 0.60 percentage points.
   

Key Ideas

• Currently, the Nasdaq is down 28.03% but yields are up 1.34 percentage points.
• Before yields can fall, they first have to stop rising. 
• If we use the May 6 yield peak of 3.12% instead of the yield when the stock market peaked, then yields are down a modest 0.24 percentage points. 

Using the Covid recession as a guide is problematic because that recession was accompanied by the largest fiscal and monetary stimulus in history. 

Moreover, the Fed currently has huge inflation headwinds blowing in its face, the exact opposite of the short-lived Covid recession.

Realistically, a Nasdaq decline of 50% is the minimum one should expect. And if inflation does not abate, then we could easily see a decline of 70% or so from the peak. 
 

Nasdaq 100 Support Levels 

Nasdaq 100 chart courtesy of StockCharts.com, annotations by Mish
 

S&P 500 Support Levels 

S&P 500 chart courtesy of StockCharts.com, annotations by Mish
 

Pullback Idea 

• A mild recession pullback on the S&P 500 would be to the 3200 level, about 33%
• A mild recession pullback on the Nasdaq 100 would be to the 7700 level, about 54%

Given the magnitude of these Fed-blown bubbles, pullbacks of 50% on the S&P 500 and 64% to 76% on the Nasdaq are easily in play. 

Headwinds of De-globalization are Inflationary, Adam Taggart and Mish Video

To better understand the Fed's inflationary dilemma, please see Headwinds of De-globalization are Inflationary, Adam Taggart and Mish Video

If You Think I'm Bearish Please Read John Hussman

If the above ideas seem outrageous or unlikely, please see If You Think I'm Bearish Please Read John Hussman

Finally, Credit Market Complacency Gives the Fed Room to Crush the Stock Market