I Smell A Trading Opportunity Coming

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 |  Includes: DZZ, EEM, GLD, TBT, TZA
by: Paul Nathan

There's a trading opportunity coming, and it should be obvious to everyone. It will be the resolution between the bearishness of the bond market and the bullishness of the stock market. With that resolution the probability of a dramatic move of markets up or down is high. A lot of money will be made in spotting early which way markets are going to move.

The move by the Russians into Ukraine is not the catalyst for this resolution in my judgment. It is my experience that geo-political events are usually short lived. They create short violent market reactions but rarely change the markets' trend. Such moves are tradable, but one needs to be nimble to capitalize on them.

More profitable is catching a more permanent turn in interest rates (NYSEARCA:TBT), a run in gold (NYSEARCA:GLD) or shorting gold (NYSEARCA:DZZ), a major correction in the market, (NYSEARCA:TZA) or a move up in the emerging markets, (NYSEARCA:EEM). There are many more vehicles of course, but the point is that we can play market reversals, and bull and bear runs with ETFs in today investment world. And with interest rates falling as the market is rising, one of these markets is most likely wrong. But which?

The bond market is the "head-scratcher". The 10-year bond has fallen from over 3% to 2.68%, the lowest in many months. Other nation's interest rates are also falling. The demand for bonds is exceptional. Rick Santelli of CNBC has given the last three bond auctions an "A" -- the first time three consecutive "A" auctions have been given in years by this skeptical bond watcher. And all of this for low returning government paper, the demand for which is running almost 3 to 1 by private institutions. This usually is a forecaster of lower GDP in the future, or deflation, or an unseen event that is creating a run to safety. Many experts have pondered this contradiction between the bond market versus the stock and commodity markets that are soaring. No good answer seems to exist to explain it.

Something soon will probably change and this dichotomy will resolve itself and will move markets dramatically. Personally, I'll be keeping a close eye on the Chinese yuan and its curious move downward last week. For five years, the yuan hasn't broken with the dollar and now it has. Many observers believed the yuan would become stronger against the dollar if freed. Either this move lower has been engineered by the Chinese government, or it's moving because it's uncontrollable and market forces are taking over. Either way, it's a time to take notice.

All the markets are acting a little perverse lately. My guess is the markets will reunite this spring in a return to more normal behavior. I will be looking for this day of reckoning and look to go long or short, whichever market is out of kilter.

If we return to the deflationary/ recessionary bias of a world running for safety, shorting gold and/or the stock market would be the play. If the world turns aggressively to reflate and/or world growth kicks in, TBT and commodities would be the play. Picking the turn early is where the next real money will be made.

Stay tuned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.