Things aren't as bad as they seem, and there are some places your capital can do some good, writes Doug Fabian in ETF Trader.

The downtrend in the general market reached a fever pitch a couple weeks ago, with the big losing session coming on June 10.

The Dow sank 172 points that day, and that punctuated a six-week bout of selling that’s brought stocks down significantly since their late-April highs. The current sell-off in stocks has brought back a flight-to-safety in the Treasury bond market, and that’s helped long-term Treasury bond prices climb strongly since their April lows.

I am of the opinion that the selling in this market has become way too overdone. I suspect that we are about to see stocks settle down.

Ultimately, we’ll also see better economic news—in the form of increased jobs and excellent earnings—that will help reignite the buying in the most beaten-down issues.

If we do see a surge in stocks due to better economic data, much of that capital likely will be drawn from the bond market. When bonds sell off, yields rise—and that inverse relationship will, I suspect, translate into a solid trading opportunity for us.

To take advantage of this opportunity before the turn in bonds takes shape, buy the ProShares Short 20+ Year Treasury Bond (TBF).

This fund seeks daily investment results, before fees and expenses, which correspond to the inverse of the daily performance of the Barclays Capital 20+ Year US Treasury Bond Index. So, if long-term bond prices climb 2%, then TBF will rise 2%.

To protect ourselves from a decline in bond yields from here, place a stop-loss order at $39 when you prepare your buy order. [This ETF was trading around $41.50 on Monday afternoon—Editor.]

Dividend-paying stocks, like the ones in the iShares DJ Select Dividend Index (DVY), held up a bit better than their broader-based brethren. The fund remains above its more technically significant 200-day moving average. [Fabian suggests a stop loss of $47.50; the ETF was trading around $52.50 on Monday—Editor.]

Our two energy positions, Linn Energy (LINE) and the Alerian MLP ETF (AMLP), have been pressured of late during the selling, but both of these energy pass-through securities pay strong yields, so we have some dividend protection here against the wider sell-off.

I know it may be out of vogue right now to be bullish on stocks, the economy, and yields, but I think that all of the pessimism out there is more hype and fear than reality.

Of course, I am not saying that all is well economically. What I am saying, however, is that when sentiment among the public and the professionals gets too bleak, you can bet that reality soon will prove them wrong. Also, I remain bullish on the growth of the Chinese consumer.

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