Montreal, Canada

Are stocks at the cusp of a major correction or worse? It would seem only normal if not healthy that stocks would correct at least 10% from current levels following a rally that has lifted the market almost 73% until its 5% cumulative decline from last Wednesday to Friday.

Since stocks bottomed in March 2009 we've witnessed several mild corrections with the deepest peak-to-trough decline occurring last June-July. That correction, barely 9%, resulted in a powerful buying opportunity for stocks as they roared ahead thereafter. Entering July, I had doubled my shorts anticipating a bigger slide; that never happened with the S&P 500 Index surging 7.4% that month.

But the U.S. broader market -- as defined by the S&P 500 Index and the Wilshire 5000 -- have both violated important short-term support levels this month and warrant investor caution.

Weekly MACD (see above chart) on the Wilshire 5000 Index has curled over from overbought levels, suggesting a significant top is approaching, if it hasn't already arrived. Interestingly, tops in the MACD have historically preceded a stock market peak about two months in advance; if that's the case now then we could be at the cusp of a major market dislocation perhaps triggered by Obama's stupid attack on the banks (and holding bank companies) or the failure to reappoint Ben Bernanke as Fed Chairman (highly unlikely).

MACD stands for Moving Average Convergence / Divergence and was created by Gerald Appel in the late 1970s. MACD shows the difference between a fast and slow exponential moving average (EMA) of closing prices. Since it is based on moving averages, MACD is inherently a lagging indicator.

As my colleague, Dugald, pointed out last Friday, the S&P 500 Index violated 1,115 as critical support last Friday (see above chart). The S&P 500 Index opens this morning at 1,096.78.

Dugald made an important argument on Friday mentioning how the stock market was topping-out alongside rising trading volume – a bearish signal. Throughout this historical rally stocks have mustered impressive advances on weak trading volume – a bearish indicator that doesn't support a long-term bull market.

Yesterday, I doubled my shorts again and reduced my equity exposure. Though I'm still slightly net long my exposure to stocks is now the lowest it's been since 1999 and will remain at these levels until we break.

My single largest asset allocation bet this year for foreign managed accounts and mutual funds is managed futures or Commodity Trading Advisors – in the midst of their worst draw-down since 2004. Historically, the best time to buy CTAs is after a draw-down, defined as a decline of 15% or more from that trading fund's all-time high. CTAs also excel when markets dislocate, unlike most hedge funds.

There's too much uncertainty unfolding this month in Washington, credit tightening in China, sovereign debt crises in Greece and corporate earnings. Plus, global equities aren't cheap compared to 12 months ago. The "easy money" is behind us.

The odds are high that this market is topping-out. The bad news gets worse because if this sell-off does materialize into something severe the Fed can't do very much to support the market because interest rates are already at zero.