Montreal, Canada

The S&P 500 Index appears to be in a correction since last week with the broader market now down 5% from its 2009 high. That figure includes the opening this morning following a disappointing September jobs report. U.S. unemployment now sits at 9.8% -- the highest level in 26 years.

From its best levels in June the American broader market declined 8% before sharply recovering in mid-July. It's still too early to call this anything but a correction since the market remains comfortably above its 200-day moving average of 899.95 (currently at 1029.85). But we'll probably violate the 50-day moving average today and that's a short-term bearish indicator.

Treasury bonds have once again vindicated the bears. Bond yields have been rallying sharply since July and proved to be an accurate warning signal; declining bond yields portend to economic weakness at this stage of the stock market rally as deflation remains a primary concern across broader swaths of the economy – namely housing, employment, wages and producer prices.

Still, the stock market might continue higher before the year is over.

Third quarter corporate earnings will be released shortly and estimates aren't exactly pretty. Any surprise in revenue growth in addition to cost-cutting will boost stocks – especially in an environment of zero percent money and over $3 trillion dollars still sitting in money-market funds earnings almost nothing.

So are Treasury bonds a "buy" at these levels?

My view is the economy will surprise to the upside for the next few quarters before sputtering again in a bad way in 2010. There's so much stimulus and liquidity running through the economy that some final demand will feed through, boosting GDP in Q3 and Q4. If that happens, bonds will get smashed.

History also suggests that big declines in economic output have been followed by equally sharp rebounds. This last occurred in 2003 and prior to that back in 1984-85. After plunging late last year, global GDP will surprise to the upside and catch many bond bulls naked at the dinner table.

If you don't own any T-bonds then I would accumulate notes in the 7-10 year range now. T-bonds are overbought short-term but the momentum looks good. If you're long T-bonds, then hold.

An investor should always have some Treasury bonds as part of a long-term asset allocation plan, especially in an age of violent capital markets. T-bonds have proved to be invaluable since 1997 when global stocks tank – heading in the opposite direction and providing important portfolio diversification.

Even if I expect a GDP surge later this year and into early 2010 the bond market might look beyond that "sugar-high" and start rallying again by-mid 2010 as another shock hits the economy. Again, aside from government spending the case for sustainable domestic consumption in the United States remains weak.

But let's be clear about one thing: Over the next five years and beyond the United States will struggle to raise funds in weekly auctions. Debt-servicing costs are challenging the U.S. and other major government budgets and the Chinese and PIMCO won't buy Treasury bonds forever. The United States, at some point, must get a handle on its spending or risk a major currency crash or the alternative – rapidly rising long-term interest rates, which the Fed can't control indefinitely.

I continue to suggest some bond hedging with TBT (Ultra Short Barclays 20+ Pro Shares) and would buy more as rates continue to decline in this stock market correction. A rally in Treasury debt should be viewed as an opportunity to accumulate more TBT as the long-term economic picture is clogged by massive spending, nervous foreign investors and the Fed's desperate push to print, print and print until inflation makes a comeback.

Have a nice weekend. See you on Monday.