With the passing of Hurricane Katrina, we want to hone our focus in upon the TLT:SPY ratio relationship. This is simply due to the enormous amount of local, state and federal debt issuance that will materialize due to the substantial nature cost of clean-up and reconstruction efforts of the Gulf Coast area. Also, there are concerns about the inflationary prospects for many building materials. So from a fundamental point-of-view we want to be a seller of bonds as we believe issuance/inflationary concerns will outweigh all economic weakness concerns.
The TLT:SPY ratio seems to bear this out, with bonds set to continue their downtrend against stocks as a 'midpoint consolidation' is rather clear on the weekly chart. Moreover, if one believes the market is in a "topping pattern" such as we do then if stocks are to decline in any way shape or form then TLT is likely to decline even more sharply. Thus, if one wants to be short with any type of confidence, we suggest being short TLT.
