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Bond Reversal Will Signal A Buy On Dip In Equities

|Includes: EEM, ProShares UltraShort S&P 500 ETF (SDS), SPY, TLT

Markets today opened down, with the worse-than-expected non-farm payrolls data, and have rallied in the past few minutes, showing a lot of choppiness. This is as yesterday's market sell-off may have already factored in today's bad numbers. The market is ahead of fundamentals again, albeit for just one day. Anyways, who says "V"-shaped recoveries can't have blips here and there, while still keeping general trend intact. Check out Scott Grannis' analysis of today's BLS report:
Calafia Beach Pundit: ADP and BLS numbers now agree
Our SDS position has pushed our three-day old model portfolio close to break-even territory, with the position sporting a 4% gain (wiping out the losses in our stopped-out long positons). We have added a short position (just a small $5,000 worth) in EEM just in case there is some momentum to this down draft.

The choppiness in the market's current down move is expected given the amount of liquidity available to get back into equities. As we've discussed before, the outflows out of money market funds have actually gone into bonds, showing a lot of skepticism behind the recent rally in equities. Any dip in equities might force the institutions from the low yields of bonds back into stocks.


Thus I would focus on the TLT chart and wait for a reversal pattern, confirmed with a firm test of support on the S&P 500 to wind down my short positions (click here for my analysis on S&P 500 support levels)This might indicate that institutions are doing the shift from bonds to equities. For now I will just hold my short positions until these signals materialize. As of the moment, while TLT is overbought short-term, it still has enough momentum to carry it higher even if it has some minor corrections (like today down 0.30%).

Disclosure: Long SDS, Short EEM