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Three ETFs to Buy Before the Post-Rally Sell-Off


Risk of capital fleeing the markets seems high.

With the equity markets 40-45% above where they were in March, and the memories of the September 2008-March 2009 collapse fresh in investors' minds, the speed at which capital could exit the market at the first signs of new risk is high.

One of the potential new risks is the escalation of the foreign policy challenges facing President Obama from North Korea to the Middle East. With the banking system reliquified and the economy starting to show some of the intended benefits of the stimulus packages, now we have another set of international issues that, coupled with the overbought situation, could cause investors to remove capital from harm's way.

1. iShares Barclays 20+ Year Treasury Bond ETF (TLT)
Trades that could benefit from equity "de-investment" include the TLT. Treasuries have become acutely oversold in the last 4 months -- a reflection on interest rates backing up for fear the government would have to sell increasing amounts of Treasuries to pay for its programs, as well as on investors' demand for a higher-risk premium.

However, last week, the day after a very disappointing 10-year T-bond auction, prices reversed strongly to the upside and have been climbing since. When there is uncertainty, in this case internationally, and investors flee to quality, where else are you going to go but into Treasuries? That's still the safe haven, still the currency of choice. Gold is not performing as well as many had hoped, which reinforces that the dollar is still the world's reserve currency, and those dollars are in short supply globally, which is especially evident during times of crisis.

In just the last few days, The TLTs have gone from about 88 to 92.5, a move of about 5%. Applying a bit of creativity, we can find a near-term bottom formation that looks conspicuously similar to, but opposite from, the patterns in gold and the euro/dollar.
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No positions in stocks mentioned.
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