Intermediate Top May Be In

Top Line: As we mentioned in our comment last Thursday morning, we do think the market reached an intermediate high and will now "correct" the rally of the past several weeks.

As we have been repeating for the past few posts, the media has pumped up the bullishness in the marketplace. The contrarian in us generally gets the chills when bullishness gets so high. We have sold a bunch of our long positions but have kept a core position in most of our favorite stocks.

We point to our standard warning systems, as boring as it is, but they have told us nothing different over the past few sessions. Treasury bonds are showing some surprising strength. Our standard proxy for the long dated T-bonds is the ETF TLT. Last Monday, TLT traded near 90 and by Friday it was near 95. This is the boring T-bond, up 5% in a week.

Meanwhile the volatility indexes seem to have put their lows in about five or six trading days ago even as the market climbed to its peak on Thursday. This shows that relative increases in prices of stocks has not improved the volatility and should be showing that the a turn is now in the works. We expect the turn occurred on Thursday morning.

The market should turn down and trade lower over the next couple of weeks. Now we just need to see the turn develop and try to estimate the low. We would normally say that the minimum distance would be about 38.2% of the prior move. From the 869 low to the 996 high is about 127 points so roughly 50 points down would be our absolute minimum down move, about 950 (basis the SP500).

We think the drop may gather some steam and could possibly drop much more than that even to the extent of going below 869, although that would be an outside chance. We don't know where it will go but we do think the bullishness is too much for it to stay up here for now.

Ultimately, when this correction plays out, we expect that bullishness will wane dramatically and we will then see a huge rally that takes the SP500 up to our initial target around 1234. It looks like our date of 9-9-09 will be more like 11-10-09 but we still like the 1234 level.

We'll be back on Wednesday evening as we continue our summer schedule.