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    Tuesday, August 12, 2008

    Stocks vs. Bonds

    Typically there is an inverse relationship between stocks and bonds, as a result of being competing asset classes. When they trade in then same direction, it's a cue that something larger is occurring under the surface. The good news is that things usually return to "normal" before too long. Until this relationship is turned right side up, I'll continue to look for one or the other to break, and be ready to take advantage. We've seen such huge moves is all groups and asset classes, that I expect the volatility to stay high. I expect to be able to short bonds or stocks very soon, though not both at the same time. We're very close to significant levels, and possible turning points. Traders should focus on this relationship for the key to where the next move will occur. This is not necessarily my premise, but perhaps the $USD move has shaken things up in the short run?

    Today's post is short, as the game remains the same. I would suggest reviewing position sizes, as times like this will catch many traders on the wrong side of an extended move. Fake outs are also more common at inflection points. I'm still looking for signals to short bonds, short financial stocks (IYF), short real estate (IYR). Rather than have a buy list for stocks, I can play the short side of bonds, as soon as the action returns to normal. The upside in commodities has been diminished by the recent smashing, but I'll continue to take buy signals in that arena also. To sum up, there is no real reason to be "heavy" in this environment, unless you are already in a trade that is working well. If not, let prices tell us more about the next direction before placing large bets.

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