This is normally a very bullish time of the year for the stock market. Santa Clause and all that nonsense. It's a retail trade time where small investors buy, and buy, and buy some more the way they're trained to do while the big money walks away for vacation. Volume trends are ridiculously low, but the markets almost always trend higher. We like that notion. Holiday cheer and good market times. Only problem is, sentiment is now becoming an important issue for this market.

The bulls are up to 58.8% or the highest level in over three years. Ouch! Bears are down to 20.6% and that's just not good. A 36.2% spread. Not good for markets to blast off from. It can continue to grind higher but that's about it. Small candle stocks after small candle sticks as the markets get more and more overbought and sentiment continues to rise. The RSI is now slightly over 70 on most but not all of the major index charts.

The combination of 70 RSI's and sentiment spreads suggest a strong pullback to come in Q1 of 2011. This does not mean bad news for the bulls. It means good news really. It allows things to calm down and unwind and that's when markets can really run back up once again. Just be prepared for a strong pullback to take place in early 2011. I think this will be a phenomenal buying opportunity, but one step at a time.

The overbought and sentiment issues should not be ignored from the perspective of not getting overly aggressive on the long side. It doesn't mean you short yet, because you don't until you see the reversal stick that makes sense. The overall picture is of a healthy market, but it doesn't mean the short-term looks great, because it doesn't, but again, I think that's good news bigger picture for everyone who is bullish. You stick with some long exposure for now until we get the reversal, but be ready to exit when the time comes.

When the sentiment issue is compared to April of last year, there is a major difference worth talking about here. The market really crashed down in June when it topped out in April with a 37% spread it. A massive move lower that was sharp, quick, but very intense. It quickly removed the froth in place and sent the bulls running for shelter as fear took over in a big way. Although the percent of bulls over bears is actually 1% higher now, I don't think the selling will be nearly as bad when it kicks in and here's why.

Volume at the time of the 37% spread in April was quite high. Now it's extremely low meaning the spread isn't really as high. Less and less people are playing the market right now. This means more and more are fearful of it, and thus, it tells me the differential is nowhere near as bad now as it was in April. It's not showing up in the numbers because those not in don't count. It tells me when the selling does begin it should be short in duration and not as bad as before. Time will tell, of course. Just something worth monitoring.

Financials are holding up well for now and are everyone's new favorite sector. Good to see these stocks bidding nicely as the fed makes sure things stay liquid in a big way. The fed is definitely aiming his money guns at keeping the financials afloat. Nothing wrong with that if you're a fan of these stocks, but they, too, will get caught up in the selling to come in Q1.

If these stocks can hold well after the selling subsides they will likely rock higher once again, and thus, I will keep a close watch on them as many of these stocks are cheap and will only get cheaper. A good sector to monitor for the pullback. The other place to watch very carefully is the froth stocks we all know about which an increasing number of more bearish set ups on their daily charts. if they sell hard enough even the froth will be worth some buys. One step at a time, of course, but those two areas will be the most interesting to watch.

S&P 500 1225 is the first very strong area of support followed by 1213, then the 1200 area. How high we get before the selling kicks in is unclear. I'd like to hope that the 1200 area will be the worst of things, but that's uncertain at this time. It depends on how much optimism creeps in before the selling gets started. 2590 is key first support on the Nasdaq. We take things one step at a time as always. Bigger picture still looks strong for the bulls. Very short-term as there are major red flags abounding due to sentiment.

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 constitutinginvestment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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