Trading with Intermarket Analysis

CHAPTER 4

Intermarket Events Surrounding the 2000 Top

This chapter covers events leading up to and surrounding the 2000 stock market top. A tripling in the price of oil during 1999 prompted the Fed to raise short-term rates enough to cause a dangerous inverted yield curve at the start of 2000. Money flowed into consumer staples and real estate investment trusts (REITs) that spring as the Nasdaq tumbled. Bond yields, stocks, and commodities peaked in that order. The Fed acknowledged the deflation threat in the spring of 2003. The falling dollar during 2002 caused commodities to bottom a year ahead of stocks.

■ Events Leading up to the 2000 Top

The previous chapter described how the global deflation fear that gripped the financial markets in 1998 caused a flight out of commodities and stocks and into the bond market. During 1999, those trends reversed. The stock market soared to a new record high while bond prices suffered one of their worst years in history. Part of the reason for the fall in bond prices was a sharp rise in the price of oil, which pushed interest rates higher around the globe. A collapse in Asian markets had pushed commodity prices sharply lower throughout 1997 and 1998. A rebound in those same markets in 1999 pushed commodity prices higher and resulted in heavy losses in global bond markets. While the rotation out of bonds helped stocks initially in 1999, the longer-lasting effects were more damaging. A recovery in Asian stock markets also contributed to global ...