The market bulls are still in control of things, but we all know that there is this one gigantic red flag out there that will come into play at some point. The thing is, we don't know when that will happen, because there is no formula to tell us when it's coming, since every bull market is different. We can look back at history as a guide, but when folks do, it doesn't usually work out very well. The reason is simple. Nothing repeats perfectly, even though we'd like to believe it does. For instance, over the past year-plus we saw 35% on the bull/bear spread start a correction, but we also saw 46% start one.

The difference is enormous. In the past, once it hits 35% on the spread, you are on full alert that things could go south out of the blue. No warning whatsoever. That said, you have to stay long because there's a chance we may get to 46% again, or thereabouts. The key thing is to understand the level of froth out there and decide the risk level. We all know that right now it's very high. My guess is, when we get the number on Wednesday of this week we will be over 40%. An extremely dangerous level.

The action today could have been the beginning of deeper selling since the place with the greatest froth, the Nasdaq, led lower. The highest P/E's live there, but the truth is, it may have simply been a one-day anomaly. So now you're all asking, well Jack, how do I know we're in trouble. The answer is very simple. If we lose the trend-line breakout, now roughly at 2220 on the S&P 500, then we have problems and NOT before. You treat all selling above 2220 as nothing more than unwinding from overbought, which we have clearly been dealing with, and ONLY a close below 2220 would change the bigger picture. That number is rising a few points every week since it's an up-trend line. So today the Nasdaq led down. It under performed, which could be a sign of something happening that can lead to bigger problems. However, for now, we treat it as nothing more than a simple pullback to unwind. Keep your eye on 2220, for now, and you can relax.

When a market gets too frothed out, such as we are witnessing right now, and the selling starts to hit, please remember that it doesn't mean the bull market is necessarily over. It could mean we are seeing the average run of the mill correction for a few weeks to months to bring in some fear, so we can climb higher once again. The level of froth we're seeing can start a real bear market, but by no means is it for sure, and, in fact, most of the time it is just a correction. A bear market usually, but not always, starts with massive distribution of tops.

It takes about 3-5 tries by the retail world to bring those moves down back up before they finally give up and the bear kicks in. You don't normally see a bear in full effect, meaning in price for 3-6 months after it actually began. It stays hidden until the retail world finally surrenders. It can happen differently, and without distribution, but that's normally the case. In a correction, there is very little in terms of distribution. You get somewhat higher volume but nothing out of the ordinary. Yes, you can get a day or so of heavier volume but no real follow through. Just something for all of you learn from and watch in the months and years ahead.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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