How the US Credit Rating Downgrade Aligns with a Projected Market Top
- May 19
- 5 min read
Moody’s just did what many expected—they downgraded the U.S. government’s credit rating from Aaa to Aa1. That means all three major agencies have now stripped the U.S. of its perfect credit score. And while that might make headlines, for cycle-based traders, the more important question is how this moment fits into the broader market rhythm.
From a macro perspective, it’s easy to understand why the downgrade happened. U.S. debt just surpassed $36 trillion, with a deficit running at 6.4% of GDP—numbers that historically only appear during wartime or economic emergencies. Yet here we are, doing it in the middle of so-called economic expansion.
But Steve’s method isn’t focused on political decisions or ratings agency behavior. What matters is how the market responds, and more specifically—whether that response aligns with the pressure already building in the cycles.
What Makes This Downgrade Different from 2011 and 2023?
In 2011, when S&P downgraded the U.S., the market dropped hard. The S&P 500 fell more than 10% in one month, and safe-haven flows pushed gold sharply higher. In 2023, Fitch downgraded the U.S., but the market’s reaction was more muted—just a 1.3% dip that quickly rebounded.
So what makes this Moody’s US credit rating downgrade different?
First, it comes at a time when inflation is still sticky, interest rates are elevated, and debt is accelerating with no fiscal anchor in sight. Second, it lands directly into a projected cycle top, not mid-cycle or during recovery. That adds a layer of structural risk that simply wasn’t present in the 2023 setup.
The news may feel similar—but the cycle environment is not. That’s why we treat this downgrade as potentially more significant in the short term, even if the headlines feel familiar.
Cycle Charts Were Already Flashing a Turn
For weeks now, our Forecast models have projected a market top near the end of the month. The intermediate cycle has been rising but approaching exhaustion. Momentum indicators have already begun to weaken, and short-term signals are rolling over.
The downgrade, then, isn’t a trigger in isolation—it’s a timely accelerant. It may validate what the cycles were already warning: that a downside move is imminent.
This is why Steve emphasizes not watching the news in isolation. The market doesn’t move just because of headlines—it moves because sentiment shifts at turning points. That’s when institutional behavior pulls back, volatility rises, and crossover averages begin to fail.
How Stops Should Be Positioned Into a Cycle Top
One of the easiest mistakes traders make during emotionally charged moments is forgetting their stops—or worse, moving them too quickly.
Steve’s framework avoids that. If you’re long heading into a projected top, your stop should already be set below the 3/5 crossover or recent swing low. This allows price to breathe while protecting your capital.
The goal isn’t to anticipate every drop. The goal is to have a clear exit structure that reacts when price and cycles confirm the break. If the downgrade accelerates selling and structure breaks down, your stop does its job. If the market shrugs it off, you stay in the trade—disciplined, not shaken.
Having this discipline is what separates proactive traders from reactive ones—and it mirrors the logic of setups we use when entering swing trades near cycle lows or pullbacks within a bullish structure.
Check our post on Swing Trading Examples Using Cycle Timing and Price Structure for more info.
What to Watch Now: Crossover Breakdown and Risk-Off Rotation
As of the downgrade, gold had already jumped 1.4%, and ETFs like GLD and GDX saw a bump in volume. TIPs (Treasury Inflation-Protected Securities) and international equity funds like EWJ also began to perk up.
This suggests that money is beginning to rotate—not violently, but strategically—into assets that reflect caution.
From a cycle-trading standpoint, here’s what matters now:
Watch the 2/3 and 3/5 crossover averages. If price breaks below them, especially with momentum cycles confirming, that’s a signal to reduce risk.
Monitor short-term reversal zones from the Visualizer chart. If we’re deep in the upper reversal zone and the news adds pressure, it’s time to lean defensive.
Don’t try to predict a crash—just let your stops work. The market will reveal its hand if structure begins to break.
The Moody’s downgrade could very well be the catalyst that shifts sentiment just enough to push markets into a pullback. But the cycle timing already had this turn projected.
People Also Ask About the US Credit Rating Downgrade and Market Cycles
What is a credit rating downgrade and why does it matter?
A credit rating downgrade means a major credit agency has reduced its confidence in a borrower’s ability to repay debt—in this case, the U.S. government. While the U.S. is still seen as highly creditworthy, the downgrade signals rising fiscal stress and can influence institutional sentiment. It’s not about default—it’s about confidence and perceived risk, which can ripple through global asset classes.
Do downgrades always cause a market crash?
No. Downgrades are not inherently destructive. But when they coincide with cycle pressure, they can act as the spark that pushes the market lower. In 2011, the downgrade hit just as the market was peaking—causing a sharp decline. In 2023, it landed mid-cycle with little damage. It’s not the downgrade itself—it’s where it lands in the cycle that determines the impact.
What are safe haven assets during a credit downgrade?
Gold is the classic safe haven, often rallying when confidence in paper assets wavers. Treasury Inflation-Protected Securities (TIPs) may also attract inflows. Some investors rotate into international equities if the dollar weakens. Steve’s method focuses less on the asset class and more on where the cycle says capital is rotating.
How should cycle traders respond to news like this?
By following their structure—not the headlines. If crossover support breaks and a cycle top is confirmed, reduce exposure. If structure holds, maintain your position with stops in place. Cycle traders anticipate the pressure—they don’t react to the news. Let structure and timing validate or reject the market’s move.
Could the downgrade cause a long-term trend reversal?
Unlikely on its own. But if the downgrade aligns with an intermediate or long-term cycle top—and sentiment continues deteriorating—it can help fuel a deeper correction. The downgrade alone doesn’t change the trend, but when timing aligns, it can tip the balance.
Why Most Traders Miss These Signals
News-driven traders often get caught reacting to events. They scramble for explanations and predictions without any structural map to guide them.
Cycle traders are different. They don’t guess where tops are forming—they see the pressure building through cycle timing, momentum weakening, and price behavior relative to crossover averages.
When a downgrade hits, they’re not surprised. They’re ready. That’s the power of structure and timing working together.
Resolution to the Problem
Most traders see news and ask, “What now?” Steve’s traders ask, “Was this already in the cycles?”
The Moody’s downgrade didn’t cause the pressure—it simply aligned with it. The market had already been flashing signs of topping, with price extended and sentiment stretched.
The solution? Don’t get caught in headlines. Let the structure, timing, and crossover levels guide your decisions. If the market breaks, you’re already prepared.
Join Market Turning Points
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Live Forecast charts that project cycle turns in advance
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Don’t trade the headlines. Trade the cycles.
Conclusion
The U.S. credit downgrade from Moody’s is more than a headline—it’s a well-timed spark that lands as market cycles are peaking.
Whether it causes a full reversal or a controlled pullback, the key is that it aligns with the rhythm we already saw forming.
Cycle traders don’t need to react. They already know the music is changing—and they’ve got a strategy to adjust before the next beat hits.
Author, Steve Swanson