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That assessment captured the essence of this year's major trends though it preceded the actual top by several weeks and several percent. The extension of the rally through April served only to exacerbate conditions; leading to yesterday's astonishing 10% intraday plunge to the February lows. Though it is history now, suffice it to say the the mid/late April highs were accompanied by the most extraordinary extremes in bullish sentiment that I have ever seen. We even established short position on two occasions right near the ultimate tops but ultra-tight stop losses sidelined us.

In all likelihood, the price lows for the movement were established yesterday at 1065 on the S&P 500 cash index. However, what likely confronts us in the coming weeks is jaw-dropping volatility and a re-test of the February lows (though perhaps not quite reaching the same price extreme).

In searching my memory I can't recall volatility of yesterday's nature since the 2008 financial collapse, 2001-2002 Tech Wreck bear market., 1998 Currency Crisis, the 1989 "mini-crash" and its preceding big brother in October 1987.

You might notice that two of these examples, 2008 and 2001-2002, were full-fledged bear markets. The 1987 plunge was certainly a bear market by magnitude but the plunge marked the end of the bear market rather than an ongoing decline. The 1989 example was a foreshadowing of the wide trading range leading to the 1990 bear market lows. The final example, the currency contagion of 1998, was a correction within an ongoing bull market. So which of the three "flavors" did yesterday represent?

First, let me say I do not think we are in a bear market.. I've contended that 2010 would be mired in a trading range. This year has already witnessed two 10% declines in the span of just over four months. That is ample evidence that my trading range prediction is correct. This process is serving to consolidate 2009's gains while also reflecting significant economic uncertainties.

Historically, bear markets are preceded by a combination of extreme bullish sentiment and eroding market internals. When I wrote in early April, market internals were lagging and sentiment was overly optimistic. However, by the time of the ultimate top speculative sentiment was rife yet market internals were actually quite good. I mention this because the requisite factors for a bear market didn't exist. Certainly we are not in a bull market given two large declines so far this year. This is why the market should be viewed as being within a wide trading range and a contra-trend strategy of trading the extremes of the range is recommended.

At present, various measures of sentiment are still elevated but dropping rapidly due to the recent rout. Personally, I wouldn't recommend establishing long positions until the speculative fever has cooled further as evidenced by, at least, middling levels on the various sentiment indicators. I suggested the coming weeks would see extreme volatility and a re-test of the recent lows. Such trading action would go far towards generating sentiment statistics more appropriate for establishing long positions.

The US Dollar's (USD)safe-haven status has been renewed following wide-spread, and poorly established, beliefs that the dollar was dead. Today, however, the USD is at an extreme and a certain degree of retrenchment or reversal seems likely. This is good news for overseas investments as a dropping USD/rising foreign currencies equals potential currency gains for US investors on top of whatever "local" returns accrue to your overseas positions.

International equities have fared quite poorly since the US Dollar's renewed strength. In fact, some European country indexes have dropped far below their February lows! So, from a reversal standpoint, this represents a tremendous opportunity and I would suggest that the recent predominance of the US equity markets is over. Overseas markets should witness more dynamic upside in the coming months.

With respect to equity-style trends, the Small-Cap segments continues to out-perform even throughout this decline. Leadership by this higher risk area suggests potent equity market upside in the coming months; though International markets are expected to out-perform.

As I suggested, almost all real assets plunged in tandem with the equity markets. One notable standout is GOLD. What is even more interesting...it is strong even with the US Dollar rallying ! (they are usually inversely correlated) There may have been some developing concerns about the Euro debt crisis leading to Gold and the US Dollar being safe-haven plays. To see them moving in tandem for long would be odd, however. This lends further credence to my expectation of a US Dollar reversal (rising Foreign Currencies).

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