Psychology Sours, Stocks Sink

Whether this is the "buy the dip" moment so many investors have been waiting for, or a sign that Christmas came early this year is hard to tell.

"It is the top," says Woody Dorsey, president of Market Semiotics, a research firm that specializes in behavioral economics. "I'm not afraid to say it."

According to Dorsey's measurements, the market hit a 100% bullish reading on Wednesday, which hasn't happened since 2000. Extreme bullish sentiment combined with a rash of initial public offerings and huge leveraged buyouts mean the market is boiling over. Dorsey says this is an interim top, meaning it is likely to last about three months.

Others are waiting to make declarations. "It is unclear," says John Bollinger, president of Bollinger Capital. "We're in a decision area and we should be looking at the market's reaction to the data, how the market handles the difference between expectations and reality," as a guide to how well stocks will hold up going forward.

There is plenty for the market to react to this week. Federal Reserve Chairman Ben Bernanke speaks Tuesday and Friday, and several regional Fed presidents are on the circuit this week. Existing- and new-home sales come out, as does the Fed's preferred inflation gauge, the core personal consumption expenditures index. Investors can look forward to same-store sales reports Thursday.