Last week the 10-year note and 30-year bond rose decidedly above the psychologically important 5.0% level. This is first time since June-2002 that the 10-year has traded above this level. If we have learned anything in our 24 years of trading – it is that interest rates matter at the margin. Moreover, the technical prospects are very good for the 10-year to rise to 5.3% and the 30-year to 5.5%. Soon, we should begin to see a slowing of the economy and a equity market correction of at least -10%.

Thus, we like to look at the Lehman 20+ year bond fund/S&P 500 "Spyders" Ratio (TLT: SPY) to glean important information. At the present time, the ratio is oversold and due for a technical bounce in the least; however, in 3 of the past 4 bounces...stocks have corrected rather sharply, but not by -10% of more. But the higher rates go...the greater the risk – especially given the underlying internal deterioration seen during last week's decline.

Therefore, we are selling stocks short – and moving to a slightly overweight short position in the Paid-to-Play "Long/Short" Portfolio.



Chip Anderson
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