Your call about the market decline was interesting. I saw it coming from the perspective that Commercial traders were establishing large net short positions in Dow futures for some time. Ahead of the Fed Commercial traders increase positions net short from 21% to 54% (largest percent net short position in 10 years), Large traders increased 7% to 17% net long, and Small traders (generally the public) increased 14% to 37% net long (largest percent net long position in 10 years).

Furthermore while prices have moved higher since 2004 Open Interest has failed to surpass the 12/16/04 high of 74,000 as compared to the recent peak of 67,000 on 6/13/06 suggesting money has flowed out while prices have moved higher. Even with the increases stated above overall Open Interest decrease by over 10,000 from the previous week. I track this data from the Commitments of Traders Reports (COT) published by the CFTC.

In summary the smartest money is betting to the short side and the run-up has sucked in the public once again. Although price structure remains intact the 2003 rally of the S&P 500 and Dow Industrials is technically and fundamentally (COT) weak. It appears that another painful lesson is about to be handed to the masses.

Here's the real reason for the stock market's fairyland climb: Bubble follows bubble follows bubble. As the Dot-com stock bubble expired, dropping the NASDAQ from 5,300 to 1,100, the psychology of the Free Lunch--money for nothing but playing with money--transferred seamlessly to the real estate market, driving it to unprecedented classic-bubble heights. As this "free lunch money" (all $2.5 trillion of it) gushed into homeowner's pockets, about 2/3 was spent (according to Fed estimates cited in previous entries) but some flowed into other investments such as the resurgent stock market.

Bubble follows bubble follows bubble. Borrowed money has also been flowing into precious metals, art, you name it: every asset class is now in a bubble, thanks to the trillions released by super-low interest rates and unlimited liquidity/low credit standards.

Market technical analysts know that "market internals" (advance-decline lines, number of new lows to new highs, volume, etc.) have been deteriorating for months. This deterioration has been masked by the rising index numbers; but the "health" of the advance as measured by technical indicators is akin to the racing heartbeat of the cardiac patient on the treadmill. Boy, his pulse is rising very healthily--until his over-worked, unhealthy heart blows a gasket.

Cynical chart watchers like me suspect another force is at work--the sucker's rally. It works like this. "Smart money" (hedge funds and other institutional players with billions in hot money) bids the stock market up by buying the heaviest-weighted index stocks--the large-cap stocks like Exxon, Microsoft, GE, etc.--which goose the indices up regardless of how well the smaller companies are faring. Then, once the "retail trade" (i.e. us poor dumb small-fry with our IRAs and 401Ks) buy into the "rally" and start buying, the "smart money" sells their shares at the top and awaits the inevitable roll-over and decline.

The Fed meets on May 10. Mark your calendar: May 11 the decline starts and then rapidly picks up velocity. The "smart money" has been exiting all month while the con was set. Reality has a nasty habit of trumping wishful thinking--or a smart con.