In the short term I still believe the bulls should stay out of the bears way for the balance of the week. We had a two and a half month run higher so a ten day correction should not be much of a surprise. The bulls were still buying calls yesterday showing that from a sentiment perspective the correction has not yet run its course either.
Nobody wants to miss a good rally even if it is built on a faulty foundation. The problem is that the issues facing the market are real. The US will not be able to run a deficit of 10% of GDP forever, many municipalities have no way of fulfilling their obligations and sovereign countries like Greece are essentially bankrupt and will default. So when these issues crop up how does one know if its just a fire drill or if its the real thing?
For the past few weeks sovereign spreads have been blowing out and municipal bonds have plummeted. Is this a false alarm or is it the point of recognition? It probably is a false alarm but eventually it will be the real thing. And at that point everybody will be accustomed to the false alarms.