I’m again very bearish short-term, basically taking the approach that we’re topping until proven otherwise. I think we’re about to roll over like we have three times since early August. Indicators show that each recovery since then has further disheartened the bears and encouraged the bulls, which is as it should be, making each top more likely the final top. It’s a process: the market shakes out as many players as possible, so that the fewest number of bulls and bears benefit.

I’ll start as I often do, with the equity put/call (10-day average) vs. SP500:

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Take a look at the similarity between the CPC and price action from January to July ’07 and that of May ’09 to today, and note the last time the 10-day average dipped below 0.55: July ’07.

The VIX is also indicating complacency, with its RSI well into “oversold” territory:

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I’m also noting the relative weakness of the Russell 2000 and Nikkei in this latest push upwards. The Russell has only recovered back to its September highs, lagging the SPX and NDX, and the Nikkei remains well below its August levels (as does Shanghai, which topped in early August):

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Multiple signs are pointing to an equity sell-off dead ahead (starting this week or next), probably at least of the magnitude of that in July-August 07 or June-July 09, which means 10%, more or less.

Whether we then recover to chop around up here another few weeks like in Sept-Oct ’07 or fall straight down like 1930 and 1938 is anyone’s guess, but CPC, VIX, DSI and Treasuries all say there could be a major top in this vicinity. For an indication of what support follows that top, you can look at technicals and  fundamentals. The first major technical support is the SPX 900-950 area, where we peaked in January and June ’09 (and bottomed in Sept ’01), followed by 750-800 (bottom in Oct-Nov ’08 and Oct ’02 and March ’03), and then of course 666.

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Fundamentally, there is no value above SPX 450, a humdrum 11.25X multiple on expected 2009 earnings. Contrary to popular belief, $40 in earnings is not at all a depressed level relative to the last 15 years, but only compared to the very peak of the bubble in ’04-’07. At 450, the market would yield a bit under 5% on today’s dividends (which are still being cut and are only at 2005 levels). A 5% yield would be no huge bargain, but a lot better than the 2% investors are getting today.

For an indication of how quickly parties like this can end, take a look at what happened to the Brazilian stock market today:

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This US-traded Brazil ETF was down over 6% before noon today, leaving the previous four trading days as an island top. (I am short Brazilian stocks and the currency.)

If the US market does roll over here by 100 SPX points or so, keep an eye on the put:call ratio. I’ll be ratcheting down stops and very wary of a retest once the 10-day average gets a standard deviation above the mean (we must be 2 SDs under it right now). That said, it wouldn’t do to get stopped out on a 30% retracement only to see the market make an Acapulco cliff dive like in ’87, ’29, ’30 or ’38 as the crowd realizes that things have only gotten worse since last year. If this turns out to be a big third wave, it could take us straight to the March lows three months after the peak.