The yield inverted back in 2007 and the subsequent rise in yield peaked and corrected in Feb08- Mar08 period. Another rise peaked in Sep08 that forced the S&P 500 to suffer a huge bearish correction. At present, the yield movement greatly resembles in 2007-08 period. So should the yield curve pick up, followed by a correction in the S&P 500 index, there is a huge possibility of a major correction coming up especially in the month of “quadruple witching” (Fig 1.b)
The correction sell-off will happen after the yield curve rebounded. First, the dot-com era inversion happens in early 2000 and the S&P 500 corrected right after the inversion occurring. The 2008 recession yield inversion happened between 2006-07 and correction sell-off only started a year later. The 2020 Covid-19 sell-off was 6 months after the September 2019 inversion.
From the result above, the inversion indicates a higher probability of a correction but the catalyst such as COVID-19, CDOs default in 2020 and Dot-com burst are the main contributing factors.
From 1986 to 2008 during these 2 decades, we dive into the wave theory and find similar pattern on the failure to touch 161.8% extension, which concludes the ((B)) wave of the complex corrective flat which brings the downside correction in 2008.