On May 8, the S&P reached its highest price since bottoming at 667 on March 6. It was up a whopping 39.4%. Since then, it has declined 5%.

On May 20, a violent outside-reversal day took place, which was very bearish (Figure 7). It was an outside day because the high price was above the prior day's high and the May 20 low price was below the prior day's low. It was a reversal day because the $SPX opened strong, but reversed course and closed weak on the day. Notice too that since April 22, the volume of stocks trading (histogram at bottom of Figure 7) on declining days (red) has been higher than the volume on rally days (gray). This is quite bearish and supports our short-term sell signal. It also leads me to believe that the correction will be more than 10%, to at least an S&P price of 837.

FIGURE 7

FIGURE 8

Figure 8 was first featured in our March 9 article when we wrote:

The point of the week is this -- the equity and high-yield bond markets will bottom along with a continued waning of severe deflation fears. The first waning has begun. When it wanes, markets will rally. When it ebbs, they will decline.

The market's worst declines during this bear market have been driven by fears of debt default and consumer price index deflation. Asset classes are acting much like they did during the 1930s, but our journey back to the future may not be for long.

Since this writing, Treasury (TSY) inflation-indexed notes, high-yield bonds, crude oil ($WTIC) and 30-year TSY bond prices have continued to indicate a waning of severe deflation fears. Our Arrow Insights (AI) 75/50 Portfolio has profited from these trends by investing in these exchange-traded funds and exchange-traded notes: the iShares Treasury Inflation-Protected Securities (NYSE:TIP); the iShares iBoxx High-Yield Corporate Bond Index (NYSE:HYG); the PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) and the UltraShort 20-Plus Year Treasury ProShares (NYSE: TBT).

Where We Are Now?

Technical analysis has not yet confirmed that the rally of the past 10 weeks is the start of a new bull market. It is a bear market rally until long-term trend indicators say so. These indicators are not shown here because no value is added until the intermediate-term signal turns positive.

A new secular bull market is most likely one-to-three years off. One or two more cyclical bulls like the one that might have ended on May 8 are customary in a secular bear market. TA empirically defines primary and countertrends.

The recent rally is a countertrend rally for many reasons.

For one, the advance was on weak volume and there is more. The stocks with the weakest balance sheets, highest short-interest and limited liquidity rose the most. The financial sector alone accounted for over one-third of the S&P's advance.

Most importantly, the $NDX:$SPX and $NDX:XLP (consumer staples) ratios have been in declines since mid-April, which is typical in bear market rallies because investors are focused on making a quick buck! In April, speculators began to overwhelm investors buying the earnings growth embedded within the $NDX.

More recently, they changed course and have returned to defense (like XLP). In new bulls, investors aggressively turn to new sectors for leadership on high trading volume. The junk that has been leading stocks since March and the comfort of XLP do not qualify.

Most indexes have touched their falling 200-day moving averages for the first time since May 2008 and are now in declines. Momentum indicators are extremely overbought. Bears are in the minority. Investors who were waiting to get even in 2009 are now selling.

So for now, TA indicates that the S&P rally will stall or decline at least 10%-15% to 790-840 within the next one-to-three months.

John Serrapere works on research and consulting projects through Arrow Insights. He welcomes comments and suggestions for future columns at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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